Increasing the transparency of prices and potential conflicts of interest in institutional trades in dark pools and automated trading systems will drive the SEC's policy agenda for the next several years and could offer investors leverage to better control trading costs.
SEC Chairwoman Mary Jo White, in a speech earlier this month, said the regulatory agency would consider requiring more disclosure of institutional trades made through dark pools and other automated trading systems, and require high-frequency traders to register as broker-dealers.
“We must continue to examine whether dark trading volume is approaching a level that risks seriously undermining the quality of price discovery provided by lit venues,” Ms. White said at a Sandler O'Neill + Partners conference in New York.
Executives from exchange operators and fund companies also are starting to join in warning that the market is beset with conflicts that can harm investors and undermine confidence. Support for a solution increased at a June 17 hearing of the Senate's Permanent Subcommittee on Investigations.
Ms. White, in her speech, “came out with one of the most sweeping policy discussions of what the SEC wanted to do on market structure,” said Robert Hegarty, managing director, global head of market structure, Thomson Reuters, Boston. “In that speech, she set policy for the next three to five years.”
Justin Schack, partner and managing director, Rosenblatt Securities Inc., New York, said: “Twenty years ago, there were two main U.S. exchanges (New York Stock Exchange and Nasdaq) while today a NYSE-listed stock can be traded on 11 different stock exchanges and 25 different dark pools.
“The number of venues creates a lot of opportunity for brokers to trade in a way that's advantageous to them and not so much for the investor,” Mr. Schack said.
Some fear that SEC rule changes could hurt pension funds, endowments, foundations and money managers that use dark pools to trade large blocks of stocks. The value of their traded shares could fall if off-exchange venues were required to disclose both pre- and post-trade information, which could tip the overall market to such large trades. However, several researchers who advise on capital markets say the SEC most likely is focusing on post-trade disclosure. They also believe that, in light of publicity on high-frequency trading since the release in March of Michael Lewis' book, “Flash Boys,” the SEC is targeting overall disclosure in trading and not picking on dark pools.