U.S. SEC proposes rules to illuminate “dark pools”

By Reuters Staff
October 21, 2009

By Rachelle Younglai
WASHINGTON, Oct 21 (Reuters) – U.S. securities regulators proposed rules to shed light on anonymous trading venues known as “dark pools,” which have triggered concerns that only a privileged few are benefiting.

The Securities and Exchange Commission voted unanimously for ways to make the dark pools more transparent, such as revealing the electronic trading messages that are sent to a limited group of market participants.

Some lawmakers and the SEC have voiced concerns that dark pools could create a two-tier market where the public does not have the same access to information on stock prices and sizes.

Dark pools have blossomed in recent years, accounting for an estimated 10 to 15 percent of U.S. equity volumes. The largest dark pools are sponsored by big securities firms like Goldman Sachs Group Inc and Credit Suisse to execute their customer orders.

“Participants in these private pools have access to information about a trade which other investors are denied,” SEC Chairman Mary Schapiro said in a statement.

Under the proposal, the private electronic messages or so-called “actionable indications of interest” (IOI) would have to be treated like regular quotes and displayed publicly.

The SEC would restrict the overall volume in a particular stock that can be hidden from the public. The agency proposed cutting the threshold at which dark pools must publicly display quotes to 0.25 percent in a single stock from the current 5 percent.

Dark pools are required to publicly display quotes if they execute more than 5 percent of the overall volume in a particular stock’s average daily volume in four of the previous six months.

Consultancy group TABB Group said there was no evidence that dark pool volume should be curtailed. “Dark pool operators would not necessarily route excess flow to an exchange but to another dark pool,” said Adam Sussman, TABB Group’s director of research. “There is nothing stopping dark pool operators from running multiple dark pools.”

The SEC also proposed requiring the private trading venues to indicate the origin of trades.

The SEC proposal falls short of reforms put forth by Democratic Senator Charles Schumer, who said the dark pools should face more robust start-up regulations and be forced to put up capital for a new market-wide monitor.

The proposal is open for a 90-day public comment period. The commission would have to vote to adopt the proposal before it could become a final rule.

(Reporting by Rachelle Younglai; editing by Andre Grenon and Gerald
E. McCormick)

((rachelle.younglai@thomsonreuters.com; +1 202 898 8411))

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