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Inching Toward Dark Pool Reporting Standards
Traders Magazine Online News, June 26, 2009
Last week Goldman Sachs Electronic Trading told clients it would begin reporting volume executed in Sigma X, its dark pool, based on single-counted matched executions. This is a departure from how Goldman has been calculating Sigma X volume. Dark pool operators generally are now mulling their options after the Securities and Exchange Commission expressed concern over the lack of reporting standards.
"Without an absolute industry protocol, we're advocating doing what exchanges have been doing for a very long time: reporting single-counted matched-only volume," said Dave Johnsen, vice president for Sigma X business development at Goldman. "If everyone else puts themselves on the same metric, the dark-pool numbers will add up to 100 percent of dark-pool volume."
Goldman is doing this in part because the SEC recently made noises about wanting more information about how much volume is occurring in dark pools and where that volume is executing. Dark pools are not required to publish this information publicly, although they must print their trades to trade reporting facilities. There is no standard for how dark pools calculate this off-board volume when they issue volume figures.
The SEC's worry is that this lack of information could impact investors' execution decisions and impair transparency in the market as dark liquidity grows. SEC Chairman Mary Schapiro said last week that the Commission has heard "concerns from market participants that the lack of post-trade transparency by dark pools makes it difficult, if not impossible, for the public to assess dark pool trading and to identify pools that are most active in particular stocks."
Dark pools accounted for 8.7 percent of consolidated volume in April, compared with roughly 5 percent in early 2008, according to institutional broker Rosenblatt Securities. May figures were not available.
But while Goldman is interested in seeing the industry adopt a uniform reporting methodology, it has not committed to publishing its volume figures publicly every month. Johnsen emphasizes that there should be industry discussion and customer feedback about various alternatives and the degree of information that could be provided publicly, including monthly volumes.
The SEC is particularly concerned about the lack of a uniform reporting methodology for dark pools. James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, said in a speech last month that dark pools "do not use a uniform methodology and may effectively overstate their true executed volume because of double counting...or by including 'touched' volume of orders routed elsewhere for execution with the 'matched' volume that they actually execute." Most dark pools double-count their volume, unlike exchanges, which single-count matched trades.
Matched volume is volume executed internally within the ATS by customers. Touched, or handled, volume includes orders routed to other non-displayed venues for executions. That handled volume may be claimed and tallied by more than one firm. "Including handled volume could inflate a dark pool's numbers," said Adam Sussman, director of research at TABB Group. Goldman's Johnsen stresses that ATS volume should exclude that handled flow.
Referring to the potential usefulness of "some form of improved post-trade transparency," the SEC's Brigagliano said that "uniform and reliable trade reporting practices could help establish a fairer playing field because those dark pools that report their volume accurately would not be disadvantaged in comparison with any that might inflate their volume."
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