SEC Proposes New Disclosures for Dark Pools

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By Rob Tricchinelli

Nov. 18 — The broker-dealers that run dark pools would have to disclose more about their operations under a rule proposed Nov. 18 by the Securities and Exchange Commission.

The rule, proposed unanimously by the four commissioners, would require a broker-dealer to publicly release information about its dealings with subscribers, order handling, opening and closing procedures, and whether certain classes of users get different treatment.

Under current regulations, there is “little information made available to the public about either ATS operations or the important relationship between the ATS and its broker-dealer operator,” SEC Chairman Mary Jo White said at an open meeting on the proposal. “The information available oftentimes does not empower investors to perform deeper or meaningful analyses or compare trading venues.”

The current regulatory framework, Regulation ATS, was adopted in 1998 and “remains largely as it was” then, White said.

Dark pools and other market structure issues have faced renewed public attention after Michael Lewis's best-selling book Flash Boys. The proposal is one of a handful outlined by White to revamp U.S. equity market structure (109 SLD, 6/6/14).

Disclosure Types

The proposal would apply to alternative trading systems that trade stocks also listed on national securities exchanges. There are more than 40 such ATSs registered with the SEC. It is estimated that dark pools account for anywhere between 15 and 40 percent of all U.S. equity trading.

Under the proposal, broker-dealers running alternative trading systems would have to disclose what services they offer to ATS subscribers, trading activity on the ATS, employees shared between the ATS and the broker-dealer, and what they do to protect confidential trading information.

They would also have to publish information about how the ATS operates, including its order types, order matching and pricing techniques, policies during disruptions, fees, access standards and market quality statistics.

The ATSs would make the disclosures on a new filing, Form ATS-N.

Regulatory Action

Dark pools have caught the eye of other regulators. New York State Attorney General Eric Schneiderman sued Barclays Plc in June 2014, alleging that it lied to its subscribers about what algorithmic traders were doing in its dark pool (123 SLD, 6/26/14).

Credit Suisse AG is reportedly nearing a settlement with the New York attorney general and the SEC of allegations that it didn't adequately disclose the activities in its dark pool (178 SLD, 9/15/15).

“This dismal litany of misconduct by dark pool operators appears to have led at least some market participants to lose faith in the ability of dark pools that are operated by broker-dealers to provide a level playing field,” Commissioner Luis Aguilar said.


“Among other challenges, it can be almost impossible for an investor to assess adequately the conflicts of interest that can arise from a broker-dealer operating an ATS,” White said. “In addition to running the ATS, the broker-dealer may conduct a wide range of brokerage, dealing, and other activities that raise potential conflicts, including customer services.”

The SEC's proposal seeks to minimize conflicts of interest, real or perceived, that dark-pool operators face.

“Many of the disclosures that today's proposal would require should reveal the very types of conflicts of interest that lay at the heart of the enforcement actions brought against dark pools by the Commission and other regulators,” Aguilar added.


The proposal “should foster greater competition” between alternative trading systems, Mark Flannery, the agency's chief economist, said at the open meeting. It “could lower trading costs and increase market liquidity and capital formation.”

The increased costs might bump some venues from the market and might raise barriers to entry for new ones, he said, but if the ATSs that exit the market have the highest costs, overall execution quality among venues could improve.

Other Provisions

The SEC would make the forms public, and ATSs would have to list their forms on their own website.

The agency would review the filings for compliance and decide whether they are effective.

Furthermore, the rule would require ATSs to have written safeguards and compliance protocols to protect the “confidential trading information” of subscribers.

The comment period on the proposal is 60 days.

In other market structure initiatives, the SEC plans to require additional transparency in order routing decisions and to formulate an anti-disruptive trading rule.

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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