The new year is expected to be an uncertain one for regulations in trading because of delays in European market rules and a U.S. pilot on tick sizes, as well as a proposal to increase transparency in dark-pool trading.
But make no mistake, said Kevin Cronin, director, global head of trading, at Invesco Ltd., Atlanta. Once the delays are gone and proposals become regulations, there will be big changes affecting institutional trading, both in 2016 and beyond. “There are a lot of things that, if they go into effect, could change the landscape of trading — in equities, but also in fixed income, derivatives,” Mr. Cronin said. “It could be a very impactful year.”
The consensus among industry participants and observers is that the dominant regulatory themes for 2016 will revolve around:
nProposed changes to the Securities and Exchange Commission's Regulation ATS;
nThe delayed start of the SEC's tick-size pilot program;
nThe delay in implementing the Markets in Financial Instruments Directive II; and
nThe possible analysis of fill orders by the Financial Industry Regulatory Authority Inc.
The SEC's proposal on changing Regulation ATS would require dark pools and other alternative trading systems to file detailed disclosures about their operations as well as the activities of their broker-dealer operators and affiliates. The proposal was announced Nov. 18 and is currently in a comment period expected to end in February. While it appears to address institutional investor concerns about information leakage on block trading in dark pools, Adam Sussman, head of market structure and liquidity partnerships at dark-pool operator Liquidnet Inc., New York, said it goes far beyond mere disclosure.
“When you dig into the SEC's proposal, they're creating new classes of trading venues,” Mr. Sussman said. “They're separating them into equity ATS, corporate bonds, over the counter, Treasuries. They're beginning to stratify the trading venues, but they'll also have different levels of disclosure. It's an entirely new regime in how they're categorized and regulated, specifically with Treasuries. In the original Reg ATS, Treasuries were specifically excluded. ... We have an asset at the heart of the American economy. The fact that it's the least-regulated security doesn't make much sense to me.”
On the equity side, most alternative trading systems have geared up for required trading disclosure, Mr. Sussman said. “But it's a new process to go through, with a review process where the SEC deems whether their filings are effective or not. Before, ATS told the SEC what they were doing and the SEC kept it under wraps. They didn't require explicit approval, and they didn't have any formal way to deny the filing. They could ask questions about the filing but not reject it. This new proposal would have a process put in place to have ATS turned down.”
Mr. Sussman said potential regulatory changes “will look at how the exchanges file with the SEC and apply some of that to ATS.”