Industry Awaits SEC's Concept Release
Traders Magazine Online News, December 18, 2009
Registered alternative trading systems that operate as dark pools accounted for 7.2 percent of consolidated equities volume in the second quarter of this year, according to the SEC. Entities that function similarly to dark pools but are not ATSs are not included in that figure.
High-frequency trading, which represents about two-thirds of equities market volume, includes various strategies that typically have a high turnover and require low latency to implement their trading decisions. Co-location refers to the practice of firms placing their servers near a market center's matching engine to increase the speed of quote and order data transmission.
The SEC provided context for the upcoming concept release last month. In its proposed new rules for dark pools, the SEC in mid-November said it was engaged in a review of equity market structure "to assess its performance in recent years and whether market structure rules have kept pace with, among other things, changes in trading technology and practices."
The SEC said it would consider issues related to various forms of dark liquidity. This will include "dark pools, the order flow arrangements of OTC market makers, and undisplayed orders on exchanges," the SEC noted.
In addition, Schapiro told Kaufman in her Dec. 3 letter that the SEC plans to consider proposing two new rules next month. One of these involves the implementation of the SEC's "large trader" reporting authority, which would provide the SEC with more information about high-frequency traders and their trading activity. The Commission has had this authority since 1990.
The other involves sponsored access. That planned rule proposal would address the risk inherent in some forms of sponsored access arrangements by requiring that broker-dealers "implement appropriate risk controls on this activity on a market-wide basis," Schapiro wrote. Sponsored access includes a range of relationships whereby firms are able to trade on an exchange or ECN using their broker's membership or market participant identifier.
This planned rule proposal would supplement Nasdaq OMX's proposed sponsored access rule. That rule, submitted to the SEC in December 2008, addresses a variety of financial and operational controls that would have to be in place for broker-dealers to offer their customers sponsored access to Nasdaq. Other market centers would be expected to adopt copycat rules when Nasdaq's proposed rule, which was updated in October, is approved. That approval, according to market participants, is likely to come soon.
The SEC in its concept release may also raise other issues that have received attention in recent months. One of these involves access fees charged by exchanges and ECNs to take liquidity from their books.
At a Senate Banking Committee hearing on market structure in October, Sen. Jim Bunning, R-KY, voiced concerns about how maker-taker pricing affects trading. James Brigagliano, co-acting director of the SEC, noted that the SEC capped the access fee at 3 mils, or 30 cents per 100 shares, when it approved Regulation NMS in 2005. Reg NMS was implemented in 2007.
The argument for maker-taker pricing is that it encourages displayed liquidity by providing a rebate to liquidity providers. "Nonetheless," Brigagliano said at the Senate hearing, "as the Commission looks further at high-frequency trading in its concept release, it would make sense to look at the impact of particular market pricing models on trading behavior."