Former Regulator Expects SEC to be Firm on Actionable IOIs
Traders Magazine Online News, December 10, 2009
The Securities and Exchange Commission is likely to take a black-and-white view of its planned interpretation of "actionable indications of interest" and could use enforcement actions to underscore new rules, according to a former top official in the SEC's Division of Trading and Markets.
Robert Colby, Davis Polk & Wardwell
Robert Colby, a former deputy director of the SEC's Division of Trading and Markets who is now counsel at law firm Davis Polk & Wardwell, said the agency has long thought actionable IOIs should be treated as quotes. "If the Commission adopts [the rules for dark pools it proposed last month], they're not going to feel constrained any longer," he said. Colby, who left the SEC in February after 27 years, helped write all of the major equity market rules of the last two decades.
The SEC last month proposed three rule changes that would affect the way many dark pools, or non-displayed alternative trading systems, operate. Two of the planned rule changes involve actionable IOIs. Actionable IOIs are messages that indicate the presence of executable liquidity in a particular trading venue.
One rule proposed treating actionable IOIs from various entities that have quoting obligations as quotations that must be publicly displayed. The other proposed rule would require dark pools to display their actionable IOIs once they reach a certain monthly volume threshold. That threshold would be lower than the current one.
The SEC, Colby told a crowd of industry participants, may come to some of their firms to find out if IOIs they're sending are "indeed actionable and [would] produce a quote." And the SEC wouldn't likely tolerate pushback. Market participants may "actually see some enforcement actions if people push the limits," he predicted. Colby spoke yesterday at a breakfast consortium about current regulatory issues sponsored by Capital Markets World, a conference organizer.
The SEC's proposed change to the Quote Rule in Regulation NMS would require the display of actionable IOIs for orders with a market value of less than $200,000. Currently, actionable IOIs fall under an exception to the Quote Rule. The new requirement would apply to three types of market participants: exchanges, over-the-counter market makers, and ATSs that exceed a certain monthly volume threshold and that quote to more than one person at a time. About a dozen brokers operating dark pools send out actionable IOIs based on orders in those pools. OTC market makers that send out actionable IOIs could also feel their business models crimped by these rules.
Colby noted that the SEC "could have re-looked at the categories" for those required to quote, but did not do that. While exchanges, OTC market makers and ATSs that meet certain requirements must quote, this group, Colby said, does not include broker-dealers that are not market makers, block positioners and other entities.
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