Financial Regulatory Forum

“Dark pools” outpacing regulators, exchanges say

October 8, 2009

JAPAN-FOREX   TORONTO/NEW YORK, Oct 7 (Reuters) – “Dark pools,” or venues where stock trades are hidden from public view, have proliferated around the globe without a “careful regulatory plan,” the head of the world’s main exchanges group said on Wednesday.
   William Brodsky, chairman of the World Federation of Exchanges (WFE), said these alternative trading venues — where stocks change hands anonymously at prices not disclosed publicly — have no regulatory obligation and lack transparency.
   “What our concern is on the dark pools is that these have evolved without a careful regulatory plan,” he told a press teleconference at the end of the WFE annual meeting in Vancouver.
   “We’ve allowed the technology and evolution of these markets to run way ahead of the regulators’ ability to integrate what’s going on in the dark pools,” said Brodsky, who is also chief executive of the Chicago Board Options Exchange, the largest U.S. options venue.
   Dark pools allow traders, especially of large blocks of stock, to hide their intentions and avoid moving share prices. They have gained traction over the last decade as the average size of trades dramatically decreased on the transparent exchanges.
   The United States has some 40 such venues, but dark pools have also grown in Europe and elsewhere. Regulators and lawmakers are increasingly concerned the venues would diminish the accuracy of public prices on exchanges.
   Brodsky stressed he is not against competition and understands the need for players to move big blocks of shares, but warned that unfettered dark pools will continue to grow.
   “Once you have dark pools you’re basically sucking the liquidity out of that bid and offer transparency that has evolved over the last several years in a very positive way,” he said.
   The U.S. Securities and Exchange Commission plans this year to bring in proposals for regulating dark pools. Canadian regulators last week asked the industry to comment on the venues, and in mid-September, a top European Union regulator said it will study the migration of share trading volumes from stock exchanges to unregulated platforms.
   Thomas Kloet, chief executive of TMX Group <X.TO>, which runs the Toronto Stock Exchange and small-cap TSX Venture Exchange, said a top priority in the dark pools debate is to ensure rules are applied evenly. “My view on this issue is all about a level playing field,” he said at the teleconference.
   “My issue with dark pools is much more about the structure under which they operate and I think we should be concerned about any time somebody can create an invisible marketplace, (and) we don’t get to comment on the very model under which it’s going to operate.”
   The WFE represents about 50 publicly regulated stocks, futures and options exchanges. (Reporting by Jennifer Kwan in Toronto and Jonathan Spicer in New York; Editing by Richard Chang) ((jennifer.kwan@thomsonreuters.com; +1 416 941 8178; Reuters Messaging: jennifer.kwan.reuters.net@reuters.com)) Keywords: FINANCIALREGULATION/DARKPOOLS 
  
Wednesday, 07 October 2009 21:52:58RTRS [nN07486950] {C}ENDS

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