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October 1, 2013

Coming Out of the Dark

New FINRA regulation would mandate dark traders report trading volumes and bring more transparency to the marketplace

By By John D'Antona Jr

Same target, different regulator.

In 2009, the Securities and Exchange Commission proposed a package of three rules aimed at operators of alternative trading systems, including dark pools. As part of the "Regulation of Non-Public Trading Interest," as the proposal was called, the SEC suggested that dark pool operators be required to attach their names to their trade reports.

This post-trade disclosure idea didn't sit well with many industry participants, primarily because the SEC believed it should be done in real time. Buyside traders and their brokers were concerned that such frequent reporting would result in undue information leakage. The proposal never got beyond the comment period.

Now, four years later, the Financial Industry Regulatory Authority is trying again. Industry sources tell Traders Magazine that a similar proposal is being worked on that would require brokers to report their off-board "dark" trades to FINRA. The exact time a broker or other venue would have to report its trades is still open to discussion, as is just when the regulator would publish the data on its website after it gets it.

A rough draft of the proposal could come as early as this month, sources tell Traders Magazine. (See "Briefs" section for details.)   

FINRA spokesman George Smaragdis told Traders Magazine in an email that the regulator expects to file the proposals with the SEC in the near future. He provided no further comment.  

Chris Nagy, KOR Trading

Driving the idea for such a rule are exchanges' and regulators' concerns that too much trading is taking place off-board in dark pools and brokers internalization engines. That hurts price formation on the public exchanges. FINRA's disclosure rule is considered a positive first step in achieving an understanding of the extent of dark pool trading.


Christopher Nagy, president at KOR Trading and former managing director for order routing and market data strategy and co-head of government relations at TD Ameritrade, told Traders Magazine that FINRA was working with the broker-dealers that run their own dark pools, other alternative trading system operators and the buyside to come up with a reporting system all could work with.

"This regulation will get passed," Nagy said of the to-be-announced regulation. "The feeling of some operators is this type of mandate to report is OK, but the frequency of said reports needs to be sorted out first."

Off-board trading accounts for around 35 percent of total volume. But for some stocks, it often runs higher, at 40 percent-or for some, as high as 100 percent. Off-board trading includes four categories: dark pools, internalization, electronic communication networks and broker block trades.

The proposed rule targets dark orders traded off-board. That include broker-dealer and private alternative trading systems, internalizers and wholesaling firms like KCG Holdings, Nagy added. The rule will not impact dark trades done on the exchanges.