Dark Pool Operators Knock SEC's Disclosure Proposal

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By Rob Tricchinelli

Feb. 29 — Dark pool operators criticized an SEC proposal to elicit more disclosures from the broker-dealers that run alternative trading systems, while some industry groups supported the proposal and public-interest organizations said it doesn't go far enough.

The Securities and Exchange Commission proposed Nov. 18 to require dark pool operators to publicly release information about the pools' dealings with subscribers, order handling, opening and closing procedures, and whether certain classes of users get different treatment.

The agency received almost 20 comment letters on the proposal by the Feb. 26 comment deadline. The proposal would revise Regulation ATS, which was adopted in 1998 and hasn't changed much since.


Dark pool operators claimed the proposal wouldn't meet the SEC's stated goals of transparency and investor protection.

Luminex Trading & Analytics LLC, which runs an alternative trading system, said the proposal is overkill, including parts that require disclosures of an alternative trading system's affiliates.

“While transparency is a fundamental aspect to why Luminex was formed to begin with, Luminex believes that too much information, or rather too much extraneous information, can cause confusion and opacity rather than transparency,” the company said. “In that regard, Luminex believes that the rule proposal goes too far and is too broad, preventing it from achieving the ends that the SEC had hoped.”

ATS operator PDQ Enterprises LLC echoed Luminex's complaints. MarketAxess Corp. said the agency shouldn't apply the rule to an ATS for fixed-income securities.


The proposal would apply to ATSs trading stocks that are also listed on national securities exchanges—“NMS stocks.” There are more than 40 such ATSs registered with the SEC, accounting for anywhere between 15 and 40 percent of all U.S. equity trading.

Broker-dealers running ATSs would have to disclose, on a new Form ATS-N, the services they offer to ATS subscribers, trading activity, employees shared between the ATS and the broker-dealer, and their protections for confidential trading information. They would also have to publish information about alternative trading system operations, including order types, order matching and pricing techniques, policies during disruptions, fees, access standards and market quality statistics.

Other industry groups backed the SEC's initiative, including the Investment Company Institute and the Managed Funds Association.

The Security Traders Association advocated for more ATS transparency but cautioned that the open-ended nature of the information provided under the proposal would make it difficult for investors to make comparisons between dark pools.

Support, Scope

New York State Attorney General Eric T. Schneiderman supported the proposal.

“The Commission has taken a meaningful step toward giving traders access to the information they need in order to make informed trading decisions,” his letter said. “I believe that these proposed rules will increase public confidence in the markets.”

Better Markets Inc., the Healthy Markets Association and the Consumer Federation of America all asked the SEC to strengthen the proposal, including by applying it to more ATSs than those that simply trade in Regulation NMS stocks.

To contact the reporter on this story: Rob Tricchinelli rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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