A Wall Street regulator is considering new rules to shine light on dark trading after the largest U.S. dark pool operator stopped sharing data on the volume of its trades.
The Financial Industry Regulatory Authority, the private-sector regulator of U.S. brokerages, may ask brokers to distinguish trades that occur in dark pools from ones that don’t, Finra chief executive officer Richard G. Ketchum told reporters today. Doing so would enable Finra to publish figures for how much trading occurs in every dark pool.
“That is an area we think raises some issues where we can, in a relatively non-burdensome way, shed some light into that area,” Ketchum said at a Finra conference in Washington.
Ketchum’s comments come as exchanges have asked the U.S. Securities and Exchange Commission to consider curbs on trading outside of public markets. U.S. off-exchange volume reached 36.2 percent of all trading in the first quarter, up from 32.8 percent last year, according to data compiled by Bloomberg.
Estimates of trading in dark pools, which don’t publish bids and offers, are published monthly by research firm Tabb Group LLC and institutional broker Rosenblatt Securities Inc. Last month, Credit Suisse Group AG (CSGN), operator of the largest U.S. dark pool, said it would stop providing data to Tabb and Rosenblatt, which Ketchum noted in his comments.
Tabb and Rosenblatt receive trading data from more than a dozen operators of dark pools and use it to estimate total trading volume in the private venues. Rosenblatt reported last month that dark pools executed 14.7 percent of total U.S. equity volume in March.
Identifying Trades
Under current reporting rules, Finra can’t with certainty break out trades that happen in a particular dark pool. That’s because brokers that operate dark pools use a single identifier for all activity.
Finra would have to propose and implement a new rule to require brokers to assign a separate identifier to indicate trades filled in dark pools. Such a rule would have to be approved by the SEC, which oversees Finra and other self-regulatory bodies.
Separately, Finra could require brokers that operate dark pools to report trading volume to the regulator.
“It sounds to me like Finra was happy to have it be voluntary,” said Adam Sussman, a partner at Tabb Group. “And now that people aren’t volunteering, they may do it by force.”
The timing of reporting would matter to investors who use dark pools, Sussman said. Large investors use dark pools to trade without moving prices and would be wary of real-time reporting that could reveal their activity to other traders, Sussman said.
