US: S.E.C. Proposes Tighter Limits on Dark Pools

[Admin]

The Securities and Exchange Commission took its first steps on Wednesday to shed light on anonymous trading platforms known as “dark pools.” The move, which Wall Street has vehemently opposed, threatens to erase much of the advantages that banks gain by operating and trading in dark pools as opposed to using the exchanges, where information on trades are available to the general public.

The agency voted on three recommendations specifically limited to dark pools that transmit electronic messages to a limited group of market participants indicating that it has an interest in either buying or selling a security.

Dark pools allow traders, especially of large blocks of stock, to hide their intentions and avoid moving share prices. They have gained traction over the last decade as the average size of trades has fallen sharply on the transparent exchanges. Since the dark pool information is not public, there are concerns that the banks may be profiting off of the information.

The first proposal would require buy and sell orders initiated inside of a dark pool be treated like other quotes and subject to the same disclosure rules as other trades.

The second proposal would lower the trading volume threshold applicable to alternative trading systems like dark pools for displaying best-priced orders. Currently platform displays must be show to the public when the trading volume for a stock is 5 percent or more. Wednesday’s proposal would lower that percentage significantly to 0.25 percent. Since dark pools are used to move large blocks of stock that the owner does not want the public to see, which could be a major blow to the system.

Lastly, the commission is considering a third proposal that would create the same level of post-trade transparency for dark pools as for registered exchanges. Specifically the proposal would amend existing rules to require real-time disclosure of the identity of the dark pool that executed the trade, raising system transparency.

The move is a win for Senator Edward E. Kaufman, Democrat of Delaware, who has been pushing the agency for months to investigate dark pools. While Mr. Kaufman praised the agency’s efforts, he warned that it would be a mistake to consider dark pools in isolation from high-frequency trading and other issues that he believes distorts the markets.

“Banning flash orders and imposing limits on dark pools should not be the end of the story, nor should they be seen as sacrificial lambs offered up by a substantial majority of Wall Street players as the price to ward off deeper review,” Mr. Kaufman said in a statement. “I’m deeply concerned that high frequency trading, left unchecked, could develop into a systemic risk, becoming simply too big and too fast to regulate.”

[Admin]

I'm welcoming this pressure very much.
All high frequency trading is functioning like a tax for regular participants, who need to pay some extra money for the same asset.