Credit Suisse wants in.
The big brokerage has gone to Washington to lobby for expanded access to dark pools.
The firm, one of the largest electronic trading firms on Wall Street, is petitioning the Securities and Exchange Commission to reform the 10-year-old fair access rule of Regulation ATS.
Credit Suisse hopes a change in the rule will make it easier to expose its customers’ orders to the dark pools of its competitors. While accounting for no more than 6 percent of overall industry volume, dark pools are steadily growing in size and stature.
The fair access rule is the section of the historic Reg ATS that forces alternative trading systems such as dark pools to open up to non-members if their share of trading exceeds a certain threshold.
“One of the problems with dark pools is that unlike ECNs and exchanges, they don’t have to let everybody in,” Dan Mathisson, head of Advanced Execution Services at Credit Suisse, told the crowd at a recent Securities Industry and Financial Markets Conference. “There is a fair access rule in Reg ATS, but it is weak and unenforceable.”
Credit Suisse’s lobbying effort comes at a time when there are some 30 or 40 dark pools operating, leading to frustration on the part of some traders trying to access all of them. Dark pool operators have been talking about linking to one another for a few years, but little has changed.
Most dark pools are operated by brokerages as isolated wells. Very few link to one another or allow access to their competitors’ algorithms.
The fair access rule requires operators of crossing systems to open up trading in a given security if their share of trading in that security reaches 5 percent of total volume for four of the past six months.
Mathisson argues the rule is outdated, unworkable, unenforceable and, therefore, unfair. First, it is impossible to determine whether or not a dark pool operator has breached the 5-percent level, the exec says. Second, even if it could be determined that a given pool was over the limit, it is too difficult and costly to connect to that pool simply to trade a single security.
“You can’t run a line to somebody for one month for one security,” Mathisson told Traders Magazine. “When they envisioned that rule it was in the days of the telephone. But nowadays there is all this connectivity required.”
Mathisson believes the rule should be changed to account for the size of the dark pool as a whole, not just its share of trading in an individual security. The SEC should make a determination that a given pool is big enough to open up to everyone or small enough to remain closed.
Size would be measured as a percentage of overall volume. Mathisson suggests that any pool whose volume exceeds one-tenth of one percent should be required to open up to all comers.
The fair access rule was already loosened once in 2005 when the SEC cut the threshold from 20 percent to 5 percent. But many dark pool operators are not eager to see it reduced further.
Fred Federspiel, chief executive at one of the larger dark pool operators Pipeline Trading, wouldn’t comment directly on Credit Suisse’s efforts, but did say that guarding against pinging or probing for information by small orders was a chief concern at his shop. “When we are talking about large institutional orders, controlling information leakage is paramount,” Federspiel said. “We need to be careful that one man’s fair access doesn’t turn into another man’s pinging or probing order.”
The SEC would not confirm talks with Credit Suisse nor would it otherwise comment for this article. Erik Sirri, director of the SEC’s Division of Trading and Markets, however, addressing a SIFMA symposium on dark pools earlier this year did note the SEC was monitoring the fair-access issue.
“Similar to the transparency problems that led to the Order Handling Rules,” Sirri said, “unfair access to significant pools of dark liquidity would raise serious concerns about two-tiered markets that disadvantage particular classes of market participants.”
