New Dark Pool Rules: “The Big Issue is Attribution"
February 24, 2010
The flashpoint for dark pools in potential new rules from the Securities and Exchange Commission boils down to identifying the venue on which a transaction between an anonymous buyer and seller takes place.
“The big issue is attribution,’’ said Jim Ross, vice president of an equity crossing facility from NYSE Euronext known as NYSE MatchPoint. “No question about it.’’
Institutions trying to move large orders without having the prices they pay affected by knowledge of who they are and where they’re trading will be most affected. This is “information disclosure to anyone who wants to take advantage of that,’’ Ross told attendees of the TradeTech conference and exposition at the Marriott Marquis Hotel in New York Tuesday.
But Ross said some form of attribution is likely to come out of the S.E.C’s review of market structures. Whether the disclosure of the venue on which a transaction takes place is delivered in real time or at the end of the day or even a day or two or three later will be the S.E.C.’s choice, he indicated.
“I think there’s going to be some attribution,’’ he said. “I don’t know that it’s going to be real time.”
The S.E.C. doesn’t have a problem with dark pools, said Kevin Foley, president of Aqua, a venue that tries to bring block orders directly to the desktop screens of institutional traders. But it is concerned that actionable indications of interest, used to spur trades in dark pools, could “evolve into something that would be” akin to a two-tiered market. In a so-called “two-tiered market,” public investors are not able to get fair access to the best available prices.
Identifying the alternate trading system where transactions are taking place could be one way of helping prevent the tiering. “Any transaction in a dark pool is reported immediately to the tape,” Foley noted. “So the only question is, ‘which ATS?’ “ handled the transaction.
Currently, dark pool trades, reported in real time, are identified as over-the-counter transactions.
Under one of the S.E.C.’s proposals for revamping rules, dark pools would not have to identify their trades, if the trades had a market value of at least 10,000 shares or a value of $200,000 or more. That would protect institutions trying to work large orders.
Disclosing venues where dark transactions are taking place would benefit short-term traders, at the expense of long-term buyers and sellers, in the estimate of market participants such as Owain Self, head of algorithmic trading for EMEA and the Americas at UBS.
“It creates more information leakage about what may be happening with people’s orders and it removes some of the benefits of dark ATSs,” he told the TRADEnews.com this week.
