SEC Adopts Rule Proposal to Curtail Dark Pool Growth

Traders Magazine Online News, October 21, 2009

Nina Mehta

The Securities and Exchange Commission today proposed a series of rule changes that would restrict communication between dark pools and, the Commission hopes, push more orders onto the displayed markets. The SEC commissioners voted unanimously to adopt the rule proposal, which the industry has anticipated for months.

Mary Schapiro, SEC

Dark pools linked together through the use of actionable, or immediately executable, indications of interest "have access to information about a trade which other investors are denied," SEC Chairman Mary Schapiro said at a Commission open meeting this morning to consider the proposal from the Division of Trading and Markets. She noted that dark pools now represent a "significant source of liquidity in U.S. stocks" and that they risk creating a "two-tiered market that deprives the public of information about stock prices and liquidity."

To limit the growth of dark pools and push more flow back onto the public markets, the SEC proposed lowering the threshold at which quotes must be publicly disseminated to 0.25 percent of the average daily volume in a stock, from the current 5 percent. Dark pools represent close to 10 percent of the industry's trading volume. Today's rule proposal is likely to be open for public comment for 60 to 90 days, before the SEC makes a decision about the proposal.

Dark pools would also have to identify their prints to the consolidated tape in real time, including the name of the dark pool where the trade occurred, unless those prints have a market value of at least $200,000. This exception is meant to protect large size trades, since the disclosure of information about these trades could hurt the interests of those engaged in executing blocks.

This exception makes it likely that Liquidnet, which uses actionable IOIs for some of its trading, would be unaffected by the proposed rules. Pipeline Trading Systems and ITG Inc.'s Posit are unaffected by the proposed changes since they do not use IOIs.

The most significant change proposed by the regulator today involves a shift in what is considered a quotation. The SEC redefined automated messages that include order-like information resembling bids and offers as quotes. This change is significant since shifts in market structure in recent years have led to the fragmentation of dark liquidity. Some industry participants suggest that this fragmented liquidity has been re-consolidated by technology, including algorithms that execute in multiple venues and the use of actionable IOIs that link dark pools to one another.

The SEC, however, isn't buying the argument about IOIs. James Brigagliano, co-acting director of the Division of Trading and Markets, said today that actionable IOIs "function quite similarly to displayed quotations and convey valuable price information, yet are privately transmitted to select market participants."

However, in a surprise move, the SEC did not define actionable quotes. Orders displayed to more than one entity at a time are typically considered quotes when they include information about the symbol, side, size and price. The Commission said it would offer the industry "guidance" that is more descriptive in nature about what constitutes a quote.

http://www.tradersmagazine.com/news/sec-dark-pool-proposed-rules-104525-1.html?ET=tradersmagazine:e430:55405a:&st=email

its not going to change anything, the way most players in dark pools link up now its just as easy to adjust the handling and beware there are dark pools behind the dark pools and they do not only deal in publicly traded instruments and what about dark collateral pools and structured guarantees for moving collateral; this is all big talk for the effect, when the actual effect will be almost 0, so nothing new here

I agree.. there is a LOT of huffing and puffing in the direction of the Name Brand Brokerage Houses.. but the lobby is to strong.. if anything the restrictions will limit the broader markets from participating at the end of the day..

It is fantastic to watch the cloud be modified though for the masses to consume..

Be well Richard, JW

I think I just said this... see above.

SEC Prepares Own Rule Proposal on Sponsored Access

Traders Magazine Online News, October 27, 2009

Nina Mehta

The Securities and Exchange Commission is likely to get tougher with sponsored access arrangements that allow firms to access the markets directly.

Mary Schapiro, SEC

SEC Chairman Mary Schapiro said she has asked her staff to develop a sponsored access rule proposal. This comes even as the SEC has been working with Nasdaq OMX Group to devise a broader rule concerning direct access to its market for nearly a year.

Any rule proposal approved for Nasdaq would be copied by other exchanges and implemented in their markets to prevent different treatment of direct access arrangements by different market centers. Nasdaq submitted a 54-page amendment to its rule proposal on Oct. 19.

Schapiro stressed the Commission's urgency in coming up with a sponsored access proposal that would be rigorous and effective enough to deal with high-frequency trading firms and others using sponsored access arrangements to reach the markets. "I recognize some markets have been seeking to address this issue, but I also worry that competitive pressures could delay an effective solution--one that would apply across all markets to assure a level playing field for all investors," Schapiro said. She spoke today before several hundred industry professionals at the Securities Industry and Financial Markets Association's annual conference, in New York.

Nasdaq last January proposed a rule concerning the methods used by both brokers and non-brokers to gain access to the markets through a broker-dealer's membership. Many market participants use direct market access through brokers to reach exchanges and electronic communication networks. However, a segment of those getting "sponsored access" has elicited concerns in the industry.

While sponsored access refers to firms accessing exchanges directly, typically through their own pipes and technology, "unfiltered" access is sponsored access that omits the pre-trade risk checks that would otherwise be implemented on that flow. This type of unfiltered access is used to shave off microseconds in sending orders to an exchange's servers.

Schapiro's comments could signal a new or altered approach to sponsored access, Richard Ketchum, CEO of the Financial Industry Regulatory Authority, told Traders Magazine. The gist of Schapiro's comments, he said, is that "this may need to be a Commission rule," rather than one proposed by the exchanges.

It is also possible that the SEC is upping the pressure on Nasdaq and other exchanges to produce a rule proposal that deals vigorously with the risk issues on the SEC's radar. Alternately, the SEC could impose a sponsored access rule on top of any rule approved for Nasdaq and other market centers.

Nasdaq said it is working with the SEC on its rule proposal. "Nasdaq OMX is the only market that has proposed rules regarding the regulation of sponsored access, and those rules are pending before the SEC," a Nasdaq spokesman told Traders Magazine. "We believe regulation is needed and that rules in this area can only be effective if they are applied consistently across markets."

http://www.tradersmagazine.com/news/sec-shapiro-sponsored-access-sifma-nasdaq-104546-1.html?ET=tradersmagazine:e436:55405a:&st=email