Financial Regulatory Forum

Liquidnet sees exemptions for large block share trades despite SEC “dark pool” review

By Reuters Staff
October 16, 2009

By Jonathan Spicer
SCOTTSDALE, Arizona, Oct 16 (Reuters) – The head of Liquidnet, a top alternative U.S. venue for trading large “blocks” of stock, said on Friday he expects special exemptions for block trading if regulators adopt new rules for the scores of anonymous venues known as dark pools.

Liquidnet, which caters mostly to buy-side institutions, now has an exemption to a 2005 law requiring alternative venues to publicly display quotes and allow fair access to market players if it executes more than 5 percent of the overall volume in a particular stock.

Liquidnet is alone with a 20 percent threshold. But the U.S. Securities and Exchange Commission is poised to propose new rules this year for the 40 some dark pools. There is widespread expectations it will lower the 5 percent threshold in order to make markets more transparent.

“If there is going to be thresholds, I’m pretty sure there is going to be an exemption for block trading, because (regulators) seem to be very clear about it,” Seth Merrin, Liquidnet’s chief executive, told the Security Traders Association conference here.

Merrin said, however, he would prefer the SEC does away with the use of thresholds altogether, calling them “pretty much a stranglehold on continued innovation in this marketplace.

“The point we want to make to the SEC is: do not impede progress. Understand that the whole market is going electronic. Let’s not deal with thresholds at all.”

The exemption was given partly because it is difficult for traders to effectively execute blocks of more than 10,000 stocks on the displayed exchanges, where the average size of trades have fallen well below 1,000 shares. SEC officials have said in recent months they are sensitive to the fact that institutions may need flexibility to anonymously trade blocks.

(Reporting by Jonathan Spicer; Editing Bernard Orr)

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