SEC Should Force Dark Pools to Improve Market Prices, NYSE Says
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By Nina Mehta
April 23 (Bloomberg) -- Private venues called dark pools and brokers filling orders away from the public markets should face more restrictions on when they can trade, according to Duncan Niederauer, chief executive officer of NYSE Euronext.
He said his company will recommend that the Securities and Exchange Commission require dark pools and market makers that want to trade stocks without quoting publicly beforehand to improve the price the customer gets by a certain amount over what is available in the marketplace.
Niederauer’s concern reflects a debate in the securities industry about whether alternative venues are making markets less transparent by not displaying prices publicly, sometimes called making a quote. While SEC rules require that all stocks trade at least at the best bid or ask in the market, NYSE says the incentive of firms quoting on exchanges is reduced if private venues can match buyers and sellers at the same level and ignore the orders that established the best price.
“They should have a pre-trade transparency reporting requirement,” Niederauer said April 21 during an interview at Bloomberg’s office in Washington. “Let’s see how excited they are about making a quote.”
NYSE has lost share to what’s called internalization, when brokers, which may operate dark pools, execute orders on their platforms at the best public price or better, Niederauer said. A dark pool is a trading venue that doesn’t quote prices publicly.
Citadel, Knight
Market-maker groups at firms including Citadel Investment Group LLC and Knight Capital Group Inc. can also fill orders away from exchanges from individual investors sent to them by discount brokers. These orders are required to transact at the market’s best price or better.
An order sent to an exchange will “get filled at the display price or better within microseconds,” Niederauer said. A microsecond is a millionth of a second. “If it’s going to be filled somewhere else, shouldn’t that person have a similar pre- trade transparency requirement to the one we have? Isn’t that a public good?”
About 30 percent of trading volume is currently executed by brokers away from exchanges, according to data from London-based Barclays Plc. Dark pools, which are part of that volume, handled 10 percent of U.S. equity trading in February, compared with 5.8 percent in March 2008, according to Rosenblatt Securities in New York.
Trade-At Rule
The SEC broached the idea of limits on trading away from public markets through what’s called a trade-at rule in a January discussion paper. It had considered and rejected the idea that brokers must improve prices for customers if they’re not already quoting at that level before adopting new rules in 2005. The regulator asked in January whether such a requirement should be conditioned on exchanges cutting or eliminating trading fees for customers transacting against orders in their books.
Credit Suisse Securities in the U.S., a unit of Credit Suisse Group AG in Zurich, told the SEC in an April 21 letter that limiting transactions in alternative venues would reduce competition among market centers and lead to higher trading fees on exchanges.
The firm, whose CrossFinder is the largest dark pool in the U.S., argued that the playing field is slanted toward exchanges, which get hundreds of millions of dollars in revenue for market data sold to vendors including Thomson Reuters Corp. and Bloomberg LP, the parent company of Bloomberg News. The broker said dark pools should be allowed to share in that money.
$1.4 Trillion
Vanguard Group said a trade-at rule would provide an incentive to display limit orders, which are requests to buy stock at a price above the current offer or sell below the bid. The Valley Forge, Pennsylvania-based company, which manages about $1.4 trillion invested in mutual funds, told the SEC in an April 21 letter that such a rule could “strike an appropriate balance between the goal of promoting public price transparency and a trading center’s interest in not displaying certain orders.”
TD Ameritrade Holding Corp. advised the SEC to resist calls for a trade-at rule. The rule would “drive retail commissions higher” and benefit high-frequency trading firms instead of individual investors, the Omaha, Nebraska-based firm said in a letter to the SEC on April 21.
Ameritrade’s discount brokers have more than 5.4 million client accounts with about $342 billion. Market makers filling orders off exchanges currently “offer superior price improvement” and more shares than are publicly displayed at the best bid or offer, the firm said.
Unfair Advantage
Different regulatory requirements for exchanges and dark pools give the latter a leg up in competition, Niederauer said. If NYSE and a dark pool come up with a similar innovation, the Big Board must file a rule that can be read on the SEC’s site and wait for commission approval, he said. That process can take weeks or months for some requests. Its rival could implement it immediately.
“That doesn’t seem fair to me,” he said. “Either we should be able to do it tomorrow or they should have to file a rule too.”
Rules enabling alternative venues to compete with bigger markets such as NYSE and Nasdaq OMX Group Inc.’s Nasdaq Stock Market made sense when those venues had the majority of volume in the stocks they listed, Niederauer said. Now that NYSE accounts for less than a quarter of trading in its own stocks, instead of 80 percent, the threat of a dominant player doesn’t justify rules that benefit smaller rivals.
“We’re not asking to be re-anointed as a monopolist,” Niederauer said. “We’re just saying if you’re going to have all these pools compete with us, keep it balanced.”
To contact the reporter on this story: Nina Mehta in New York at [email protected]. |
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