The Financial Industry Regulatory Association has officially announced new disclosure rules for dark pools and industry executives are OK with them so far.
The rules stipulate that operators of these off-board trading venues report their weekly trading volume and the number of trades for each security. Traders Magazine previously reported that a rule was forthcoming and that a timeline was taking shape for release, comment and approval. Finra officially filed the rule on September 30 with the Securities and Exchange Commission.
As per the rule filing, Finra has proposed Rule 4552, which will require each ATS to report to Finra volume information regarding transactions within the ATS in securities (both equity and debt) subject to FINRA trade reporting obligations. Each ATS will be required to report to Finra the aggregate weekly volume of transactions and number of trades within the ATS by security, and Finra will make the reported information for equity securities publicly available on a delayed basis.
Finra has proposed a two-week delay before publishing the reported data on Tier 1 NMS stocks on Finra’s website and a four-week delay for all other NMS stocks and OTC Equity Securities.
Furthermore, the proposed rule change also requires that each ATS use a single, unique Market Participant Identifier (MPID) when reporting information to Finra. The reporting obligations in the proposed rule change apply to transactions in NMS stocks, OTC Equity Securities, and TRACE-Eligible Securities. Each ATS must obtain a single, unique MPID that is designated for exclusive use for reporting each ATS’s transactions. A firm would not be permitted to use multiple MPIDs for a single ATS, and if a firm operates multiple ATSs, each ATS would be required to have its own MPID.
Driving the idea for such a rule are exchanges’ and regulators’ concerns that too much trading is taking place off-board in dark pools and brokers internalization engines. That hurts price formation on the public exchanges. FINRA’s disclosure rule is considered a positive first step in achieving an understanding of the extent of dark pool trading.
Off-board trading accounts for around 35 percent of total volume. But for some stocks, it often runs higher, at 40 percent-or for some, as high as 100 percent. Off-board trading includes four categories: dark pools, internalization, electronic communication networks and broker block trades.
According to Finra, the proposed rule change will enhance Finra’s regulatory and automated surveillance efforts by enabling it to obtain more granular information regarding activity conducted on or through individual ATSs. It will also enhance the regulator’s ability to determine whether an ATS is subject to any provisions of Regulation ATS that are triggered by exceeding volume thresholds. The proposed rule change will also enhance transparency into the over-the-counter market.
So far, the industry appears OK with the rule as proposed. Robert Felvinci, head trader at Spinnaker Trust in Maine, said he didn’t have an issue with a dark reporting rule, as long it incorporated some type of reporting delay period.
“I don’t have an issue with the reporting of trading data, but there should definitely be a delay in the reporting of these trades to protect against high-frequency trade operations in the market that are looking for opportunities to profit from this trading information,” Felvinci said. “Whether that delay is two days or two weeks, I don’t think it matters that much, just as long as there is a delay.”
He added that those who are against any type of delay or who want the data immediately are individuals representing HFT businesses or those who claim to represent the retail investor.
Those in favor of such as rule, such as Felvinci, are traders simply trying to do their fiduciary responsibility of getting best execution for their clients and avoid getting gamed.
As for the exchanges and internalizers, the early consensus looks to also be in favor of a dark trading proposal.
While spokesmen for Nasdaq OMX and NYSE Euronext both declined to comment, a spokesperson for BATS did tell Traders Magazine that it supports FINRA’s efforts to provide more information.
“We have always believed in providing transparency wherever appropriate, and we support FINRA’s efforts to try to bring an appropriate level of transparency to trading that happens away from the lit exchanges,” the BATS spokesperson said.
Direct Edge declined to comment.
And at least one of the internalizers is OK with a rule proposal. A spokesperson for KCG Holdings, the company formed by the union of Knight Capital and Getco, said the firm supports providing investors with increased transparency around where to source liquidity.
“We look forward to commenting on the proposal when we have the opportunity,” the spokesperson said back in early September.
The regulator has also requested comment on whether the new rule should cover dark trading outside of ATSs, such as broker-dealer internalized executions, trades executed in the over-the-counter market by wholesale market makers trading with order entry brokers, and executions on broker crossing systems that have not filed a Form ATS with the Commission.
Dark pool operators, big and small, seem to be comfortable with FINRA publishing the data, as long as it doesn’t compromise their mission of providing liquidity and anonymity.
Dan Mathisson, head of U.S. equity trading at Credit Suisse and operator of the largest dark pool, Crossfinder, told Traders Magazine back in September prior to the rule’s announcement that he supported the idea of the FINRA proposal despite not seeing a draft of any rule or the details. Credit Suisse was one of several dark pool operators that self-reported volumes for a time; it stopped in April, due to frustration concerning the lack of uniform reporting criteria among self-reporters.
“Overall, we’re looking forward to it,” Mathisson told Traders Magazine back in September before the FINRA regulation was officially announced. “It would be healthy for the market for everyone to report volumes and have the same reporting methodology. Consistent reporting criteria are the key. The ad hoc way things were being reported frustrated us.”
Keith Ross, chief executive of PDQ ATS, a Chicago-based alternative trading system, recently told Traders Magazine he too was OK with proposed new rules governing dark pools and initiatives aimed at making them more transparent. Ross said he was in favor of more transparency, as it would bolster investor confidence in the equity markets, something he felt was needed to boost trading volume overall.
“FINRA has proposed each of the ATSs report by issue the amount of stock they trade in a given week,” Ross said, based his knowledge of the proposed rule. “ATSs will have a week to report their data, and then FINRA needs another week to collate this data and then publish any report. There will be a public record of how much volume of stock is trading in a particular venue.”
As a dark pool operator, Ross said it wouldn’t be difficult to respond to this new requirement from FINRA for more data.
