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September 2, 2013

More Disclosure Wanted

Buyside traders demand that the Securities and Exchange Commission press exchanges and dark pools for more trade information

By Peter Chapman and John D'Antona Jr.

Buyside traders want the Securities and Exchange Commission to wrest information about the inner workings of exchanges and alternative trading systems from their operators.

That was the consensus of traders from 37 buyside desks who participated in a workshop put together by broker-dealer Bloomberg Tradebook. Based on the discussion, Bloomberg produced a list of 17 questions for exchange and ATS operators about their order handling practices.

Ray Tierney,Bloomberg Tradebook

In June, Bloomberg sent that list to the SEC, asking the regulator to require exchanges and ATSs to provide answers to the questions. Those answers should then be made available on the SEC's website in a standardized grid format. The purpose is to provide investors with a better understanding of market structure and the role each exchange or ATS plays in it.



The questions are grouped into three categories. First, traders want to know if an exchange or ATS has any affiliates that might be trading in the venue. The concern harkens back to the Pipeline Trading episode in which an affiliate of the dark pool operator secretly traded against buyside orders.

Second, traders want to know something about the order handling practices of the venue operator. Specifically, they want to know if the venue is sharing information with a third party. This concern harks back to the LeveL ATS affair in which the dark pool operator shared sensitive information with its routing partner, Citi's Lava Trading.

Finally, the traders seek some understanding of the venue's order matching methodology. Pointedly, they want to know if a venue offers certain players special advantages. This concern echoes recent criticism from the buyside that some exchange order types may give professional traders unfair advantages.

The buyside also believes it may be advisable for the SEC to review exchange order types periodically and if it finds there is not much usage in a particular order type, it should consider eliminating it.

At the workshop, the traders "expressed a real need for more transparency around how their equity orders are handled and how orders interact with the marketplace-on exchanges or ATSs and in dark pools," Tradebook president and chief executive officer Ray Tierney said. "And at Bloomberg Tradebook, we fundamentally believe that transparency drives trust in the marketplace."

In his letter to the SEC, Tierney said the buyside believes "the Commission should strive to provide additional transparency and a more standardized disclosure process."



At least one buyside trader with whom Traders Magazine spoke agreed. Cheryl Cargie, head trader at Ariel Investments, said: "We definitely want more clarity on these important market structure issues from both the exchanges and ATSs." 

See Table: Questionairre

Whether just one of the above questions gets adequately answered or all three are, increased transparency in the marketplace can only help the buyside trade better, she said.