The International Organization of Securities Commissions, a think tank for the world’s securities industry regulators, is taking aim at dark pools.
IOSCO’s influential technical committee last week published a paper that directs its members to consider reining in the practices of dark pools. While acknowledging the benefits of dark pools, the committee identifies a number of potential problems that it believes regulators should address.
The Madrid-based body’s biggest concern is over transparency. The relative lack of both pre-trade and post-trade transparency, when compared with that of public exchanges, could damage the price discovery process as well as hamper the search for liquidity, IOSCO wrote.
Heretofore, IOSCO has largely confined its work to the regulation of public exchanges. With the publication of last week’s paper, however, it considers extending the transparency requirements of exchanges to dark pools. (In the U.S., dark pools are operated by broker-dealers.)
Specifically, IOSCO is concerned that because dark pools (and exchanges’ dark orders) do not publish their quotes, they do not contribute to pre-trade price discovery. That raises the issue "whether they free-ride on the revealed intentions of other participants in the market," IOSCO wrote.
IOSCO also noted the lack of quote information means that unless a liquidity seeker has the ability to send indications of interest, the only way to find contra interest is to route an order to a dark pool. This could cause a "possible impact on market efficiency with participants having to ping multiple dark pools," IOSCO stated.
IOSCO had a laundry list of recommendations for regulators. It suggests they should consider whether or not so-called "actionable IOIs" should be deemed quotations, and therefore displayed. Second, IOSCO recommends that regulators consider whether or not the identity of the dark pool should be revealed once the trade is consummated. Regulators should decide whether the dark pools should be identified on a real-time basis or an end-of-day basis and whether dark pools should be identified on a trade-by-trade basis or in the aggregate.
Perhaps coincidentally, the U.S. Securities and Exchange Commission last year proposed three rulings dealing with dark pools’ use of IOIs and post-trade reporting similar to IOSCO’s recommendations. The SEC has yet to rule on these.
While IOSCO deals with the issues facing all 180 of its members, its technical committee focuses on the world’s most developed markets. It is considered a standard-setter. In 1999, for instance, the SEC adopted disclosure rules covering foreign private issuers that were developed by IOSCO.
The IOSCO paper could strengthen the hand of public exchanges in the U.S. that have complained they are not on a level playing field when competing against broker dark pools. Over the past year or so, exchanges have called for new rules on dark pools and new opportunities for themselves such as sub-penny trading.
At least one exchange official was upbeat after the release of the report. "The IOSCO report is interesting," Bob Greifeld, Nasdaq OMX chief executive, said last week during a quarterly earnings conference call. "It represents an opportunity for exchanges. IOSCO represents the collective view of securities regulators across the planet."
