Post by anenro on Nov 20, 2015 18:27:19 GMT 4
The SEC has decided to propose new rules requiring "dark pools" and other alternative trading systems to make public detailed information about their operations, activities and potential conflicts of interest. Dark pools were originally designed to help institutional investors transact large orders anonymously without tipping the market to their intentions, but they have become accessed by many types of traders. According to Rosenblatt Securities, the venues have grown to represent 16% to 18% of U.S. equities trades today, compared with just 4% in 2008.
Shedding Light on Dark Pools
Commissioner Luis A. Aguilar
Nov. 18, 2015
Today, the Commission considers proposing much-needed enhancements to the regulatory regime for alternative trading systems (“ATSs”) that trade national market system (“NMS”) stocks.[1] I will support these proposals because they could go a long way toward helping market participants make informed decisions as they attempt to navigate the byzantine structure of today’s equity markets.
The Role that ATSs Play in Our Markets Today
ATSs reportedly first appeared in the late 1960s, but they truly began to flourish after the Commission’s 2005 adoption of Regulation NMS.[2] Today, there are more than 40 active ATSs registered with the Commission,[3] and those that trade NMS stocks have, by some estimates, accounted for nearly 18% of all trading in those stocks at various times over the past two years.[4] That figure represents a more than fourfold increase since 2005, when ATSs accounted for roughly 4% of NMS stock trading.[5] In fact, some ATSs now execute a larger portion of consolidated volume than smaller exchanges do.[6] The ascendance of ATSs in recent years is the result of a confluence of factors, including a prolonged period of subdued market volatility[7] and the ability of ATSs to offer certain advantages, such as attractive fee structures, price improvements, and faster processing speeds, among others.[8]
Yet, perhaps the greatest catalyst for the rise of ATSs in recent years has been institutional investors’ growing need to trade large blocks of stock without causing markets to move against them.[9] This need is not new,[10] but it has become increasingly acute with the advent of algorithmic trading strategies and the diminished order sizes that have resulted.[11] ATSs responded to this need by offering ever more trading on an anonymous basis, and without displaying specific order information before trades occur.[12] These types of ATSs have come to be known as “dark pools.”[13]
Dark pools initially portrayed themselves as havens from predatory traders. They achieved this, in part, by excluding high frequency traders, who supposedly use brute speed to front-run institutional investors’ large orders.[14] Lured by this promise of safety, institutional traders embraced ATSs as a solution to their trading needs.[15] Unfortunately, all too often the safety these investors sought proved illusory.
Bad Things Can Happen in the Dark
Attracting sufficient liquidity to achieve critical mass has proven a continuous challenge for many dark pools. They have addressed this existential problem in various ways. For example, many dark pool operators have allowed their own proprietary trading desks to have access to their pools, while other operators have allowed their affiliates to trade within their pools.[16] And still other operators have given high-speed traders access to their dark pools,[17] all in an attempt to ensure that ATS subscribers will find counterparties for their trades as quickly and consistently as possible.
Setting aside the propriety of these approaches, their adoption suggests that the implacable need that dark pools have for liquidity has intensified certain conflicts of interest between them and their subscribers. The inability to properly manage these conflicts of interest has led the Commission to bring a number of enforcement actions against dark pool operators in recent years.[18] For example, in 2011, the Commission brought an enforcement action against one dark pool operator for falsely advertising that no proprietary trading took place in its dark pool.[19] In reality, one of the operator’s affiliates not only engaged in proprietary trading in the pool, but it also secretly enjoyed unfair informational advantages, which it used to front-run subscribers’ trades.[20]
The lesson from this case, however, apparently fell on deaf ears. For just a few months ago, the Commission settled another enforcement action against one of the oldest dark pool operators because it, too, had failed to disclose that it was engaged in proprietary trading within its pool.[21] That dark pool operator also gave its proprietary trading desk an unfair informational edge over other subscribers, despite guidance from the operator’s compliance department that this was improper.[22]
Of course, conflicts of interest come in many guises. For example, the Commission has brought enforcement actions against dark pools for failing to protect their subscribers’ confidential information.[23] And, just last year, the Commission brought an enforcement action against one operator of a large dark pool because, among other things, it secretly offered high speed traders special order types that gave them an unfair advantage over other subscribers.[24] Interestingly, this savvy dark pool operator knew how to play both sides of the fence. In addition to giving high frequency traders an unfair edge, this operator secretly allowed certain of its favored subscribers to avoid trading with those very same high frequency traders.[25]
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.[26] Bereft of regulatory intervention, these market participants seem to be taking matters into their own hands. Nine of the largest asset managers have banded together to form their own dark pool, one that is operated by and open exclusively to institutional investors.[27] According to reports, one of the goals of this new “buy-side institutions only” dark pool is to “eliminat[e] the types of profit driven conflicts of interest that have been seen in some existing venues.”[28] This action by buy-side investors with approximately $14 trillion in assets under management[29] seems to be a clear warning the markets aren’t working as well as they could, a warning that has gone unheeded for far too long.
Shining a Light on Dark Pools
A common thread running through the enforcement actions against dark pools is that market participants lack crucial information about how these ATSs function—and about the serious conflicts of interest they can harbor. Today, the Commission takes steps toward shedding much needed light onto dark pools by requiring certain ATSs to be more transparent, and by requiring them to undergo Commission review to ensure that they qualify for the exemption from registering as an exchange. The rules and amendments proposed today will require ATSs that trade most types of equities to furnish both investors and the Commission with much more detailed information about their operations. Importantly, 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.
For example, the proposal would require operators of covered ATSs to disclose whether they or any of their affiliates are submitting trades to the ATS, either on a proprietary basis or otherwise.[30] Covered ATSs would also be required to publicly disclose whether they or a subset of their subscribers enjoy any advantages over other subscribers, such as special order types and preferential access to trade information.[31] The proposal would also require covered ATSs to disclose their policies and procedures for ensuring the confidentiality of subscribers’ information, and these ATSs would also have to identify the positions of employees and third parties that have access to this information.[32]
The additional disclosures that would be required under today’s proposal will go a long way toward enabling investors and broker-dealers to make more informed decisions about which ATSs they may wish to route their orders to. But the Commission should not stop there. Instead, the Commission should give careful consideration to whether additional measures are warranted. For example, are the conflicts of interest confronting many ATSs so intractable that ATSs should simply be prohibited from engaging in any activity other than operating the ATS? In addition, the Commission should dust off its 2009 proposal regarding non-public trading, and determine whether the threshold for ATSs to display their orders should be lowered to account for their much larger role in today’s equity markets.[33]
Additionally, I hope that the Commission will examine whether Regulation ATS should be expanded to include platforms that trade government securities exclusively, and what information those entities should publicly disclose about their operations. The release includes questions on these and other important issues, and I urge commenters to weigh in with their views so that the Commission will be able to pursue new rules with the benefit of the knowledge, views, and experiences of a variety of market participants.
The Road Ahead
Looking more broadly at our evolving market structure, it seems clear that ATSs will continue to play an important role in the coming years. Yet, the precise contours of that role, and the implications it may hold for investors, are not immediately evident. In particular, I think the Commission should explore certain issues as it seeks to better oversee our markets.
First, given that the average trade sizes on dark pools that trade equities have fallen to the same levels as those seen on lit exchanges,[34] what is the future of block trading? Does that future differ for large-cap and smaller cap stocks? And does block trading need to be re-conceptualized to account for the algorithm-driven trading that dominates today’s markets? For example, should market participants redefine block trades as a percentage of average daily trading volume, rather than as a fixed number of shares?[35]
Second, can ATSs attract sufficient liquidity to remain viable without engaging in the types of misconduct that have given rise to the enforcement actions I mentioned earlier? Can ATSs survive without the participation of high frequency and other algorithmic traders? If not, can ATSs facilitate meaningful block trading?
Third, does the current regulatory structure favor the expansion of dark pools? If so, what does this portend for the complexity and fragmentation of our equity markets? Should the Commission consider limiting the growth of equity ATSs, especially if that growth begins to threaten the quality of price discovery, as some studies suggest it might?[36] Alternatively, should the Commission consider curbing the volume of orders that are executed in dark pools, as the second Directive on Markets in Financial Instruments, or MiFID II, will do for smaller orders in Europe?[37] In any case, I think the Commission should monitor this European experiment, and see what lessons can be drawn.
Fourth, are ATSs the best model to facilitate block trading? If not, what other approaches might fare better? Why have recent efforts to establish trading venues for block trades failed to return block trading to pre-financial crisis levels, despite clear interest from market participants to engage in such trades?[38]
And finally, can ATSs for fixed income securities potentially fill the vacuum created by the retrenchment of traditional broker-dealer activity in those markets?[39]
Clearly, the relentlessly changing nature of our capital markets requires the Commission to be a proactive participant, knowledgeable and informed as to market innovations and trends. The public is not well-served when the SEC lacks information or is merely a passive observer. Today’s proposed rules will enable the Commission, our staff, and the public to have better visibility into what has been a murky segment of the market.
Ultimately, an informed regulator is a more effective regulator, and an effective regulator is vital for investor confidence and market integrity.
Conclusion
In conclusion, I will vote to approve these proposed rules and amendments because they mark a significant step forward in the Commission’s efforts to enhance the oversight of ATSs that play a vital role in today’s equities markets. I remain mindful, however, that there is still much work to do to ensure that investors have access to the types of disclosures they need in order to make informed decisions.
Lastly, I would like to call attention to the efforts of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of General Counsel and to their hard work and diligence.
________________________________________
[1] Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. XXXXX (Nov. 18, 2015) (File No. #####) (“Reg ATS Transparency Proposal”).
[2] Gary Shorter and Rena S. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developments, Congressional Research Service, 1, 5 (Sept. 16, 2014) (noting that ATSs first appeared in “the late 1960s” and that “Reg NMS is widely said to have helped advance [ATSs’] expansion by abolishing an earlier rule that protected manually submitted exchange (non-electronic) quotes, thus helping to foster more innovative electronic trading venues, including the dark pools.”), available at www.fas.org/sgp/crs/misc/R43739.pdf; David Bogoslaw, Big Traders Dive Into Dark Pools, BloombergBusiness (Oct. 3, 2007) (noting that “lternative trading systems, or ATSs, have gained an increasing share of equity trading in the past few years,” and that “[m]ore recently, the motivation for using them has been the quantities of stock being traded and the ability to keep these transactions hidden—and anonymous.”), available at www.bloomberg.com/bw/stories/2007-10-03/big-traders-dive-into-dark-poolsbusinessweek-business-news-stock-market-and-financial-advice; Leslie Boni et al., Dark Pool Exclusivity Matters, 2 (May 2012), available at www.bankofcanada.ca/wp-content/uploads/2012/11/David-Brown.pdf; Richard Henderson, Judgment day approaches for Reg NMS, The Trade News (May 14, 2013), available at www.thetradenews.com/Regions/Americas/Judgement-day-approaches-for-Reg-NMS/.
[3] See ATS Transparency Data Quarterly Statistics, Third Quarter of 2015 FINRA, available at www.finra.org/industry/ats/ats-transparency-data-quarterly-statistics; see also Alternative Trading Systems with Form ATS on File with the SEC as of October 1, 2015, Securities and Exchange Commission (Oct. 1, 2015) (listing 86 ATSs registered with the Commission), available at www.sec.gov/foia/ats/atslist1015.pdf. Of the more than 40 active ATSs, 38 currently trade NMS stocks. See Reg ATS Transparency Proposal.
[4] See Regulation Systems Compliance and Integrity, Securities Exchange Act Release No. 73639, p.55 (Nov. 19, 2014) (noting that “based on data collected from ATSs pursuant to FINRA Rule 4552 for 18 weeks of trading in 2014, the trading volume of ATSs accounted for approximately 18 percent of the total dollar volume in NMS stocks, with no individual ATS executing more than five percent”), available at www.sec.gov/rules/final/2014/34-73639.pdf; The Dark Side of the Pools: What Investors Should Learn From Regulators’ Actions, Healthy Markets, 7-8 (Sept. 15, 2015) (citing September 2015 statistics from Rosenblatt Securities, which show that ATSs trading accounted for just under 18 percent of all consolidated volume during certain periods of 2015), available at static1.squarespace.com/static/5576334ce4b0c2435131749b/t/56213828e4b05c7f88ae68b3/1445017640977/DarkSideofthePoolsReport.pdf.
[5] Scott Patterson, ‘Dark Pools’ Face Scrutiny, The Wall Street Journal (June 5,2013), available at www.wsj.com/articles/SB10001424127887324069104578527361102049152; A Guide to High-Frequency Trading (HFT), Wall Street Week (July 19, 2015) (noting that “n 2005, prior to the implementation of Reg NMS, dark pools only made up 3-5% of volume in the market. Today that number is around 15-18% on most days and continues to grow.”), available at wallstreetweek.com/read/a-guide-to-high-frequency-trading-hft/.
[6] Regulation Systems Compliance and Integrity, Securities Exchange Act Release No. 73639 (Nov. 19, 2014), available at www.sec.gov/rules/final/2014/34-73639.pdf.
[7] Volatility stirs, markets unshaken, BIS Quarterly Review (Sept. 14, 2014) (characterizing the period following the financial crisis as “a prolonged period of unusual tranquility” and, hence, low volatility, in the markets), available at www.bis.org/publ/qtrpdf/r_qt1409a.htm. When markets experience bouts of extreme volatility, dark pools typically experience declines in their trade volume because, in those situations, traders are generally more concerned with ensuring that their transactions will be completed in a timely manner, and are less willing to wait for the best price to emerge from a dark pool. See, e.g., Sam Mamudi, Dark Pools Were the Losers as U.S. Markets Saw Volume Spurt, BloombergBusiness (Aug. 24, 2015), available at www.bloomberg.com/news/articles/2015-08-24/dark-pools-are-the-losers-as-exchanges-get-huge-volume-from-rout. Although the period following the financial crisis has generally been a calm one, there have been exceptions. Over the past few years, markets have experienced several short-lived episodes of heightened volatility. In fact, this past summer alone witnessed two sharp spikes in volatility, first in July, when the Greek debt crisis came to a head, and again the following month, when fears that China’s economic growth had slowed markedly became widespread. See Sinead Carew, Wall St. tumbles as investors flee equities on Greek debt crisis, Reuters (June 29, 2015), available at www.reuters.com/article/2015/06/29/us-markets-stocks-idUSKCN0P91NO20150629; Sam Mamudi, Dark Pools Were the Losers as U.S. Markets Saw Volume Spurt, BloombergBusiness (Aug. 24, 2015), available at www.bloomberg.com/news/articles/2015-08-24/dark-pools-are-the-losers-as-exchanges-get-huge-volume-from-rout.
[8] Gary Shorter and Rena S. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developments, Congressional Research Service, 4-5 (Sept. 16, 2014), available at www.fas.org/sgp/crs/misc/R43739.pdf.
[9] David Bogoslaw, Big Traders Dive Into Dark Pools, BloombergBusiness (Oct. 3, 2007) (noting, in 2007, that “[t]rading huge quantities of stock on traditional exchanges has become ever more challenging, costly, and potentially disruptive. And if other players see your moves, they can disrupt your trades. That's led to the emergence in recent years of alternative trading systems known as dark pools.”), available at www.bloomberg.com/bw/stories/2007-10-03/big-traders-dive-into-dark-poolsbusinessweek-business-news-stock-market-and-financial-advice.
[10] Maura McDermott, Shadows fall over dark pool trading practices, Financial Times (Dec. 18, 2011), available at www.ft.com/intl/cms/s/0/4a2000bc-24b3-11e1-ac4b-00144feabdc0.html.
[11] Equity Market Structure Literature Review Part II: High Frequency Trading, Division of Trading and Markets, Securities and Exchange Commission, (Mar. 18, 2014) (noting that “HFT proxies include high message rates, bursts of order cancellations and modifications, high order-to-trade ratios, small trade sizes, and increases in trading speed. These proxies generally are associated with the broader phenomena of algorithmic trading and computer-assisted trading in all their forms”), available at www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
[12] See Christopher Mercurio, Dark Pool Regulation, 33 Review of Banking and Financial Law 69 (2013)(noting that “[d]ark pool trading has steadily increased in market share over the past five years”), available at www.bu.edu/rbfl/files/2014/03/RBFL-V.-33_1_Mercurio.pdf; Reg ATS Transparency Proposal (noting that “ince the third quarter of 2009, the number of ATSs operating as dark pools has increased from 32 to more than 40 today.”).
[13] Haoxiang Zhu, Do Dark Pools Harm Price Discovery?, 2 (Nov. 16, 2013), available at www.mit.edu/~zhuh/Zhu_darkpool.pdf; Tom Winter, Gazing Into 'Dark Pools,' the Tool that Enables Anonymous Insider Trading, CNBC (Jan. 23, 2013) (noting that “[w]hile all exchanges have a degree of anonymity, dark pools have an increased level of secrecy because neither the size of the trade nor the identity of the participants are revealed until a trade is filled”), available at www.cnbc.com/id/100400981.
[14] See, e.g., In the Matter of Pipeline Trading Systems LLC et al., Exchange Act Release No. 65609, 10 (Oct. 24, 2011) (noting that “n press releases and other marketing materials issued in 2008 and 2009, Pipeline stated that its ATS provided protection against ‘statistical arbitrageurs’ and ‘high-frequency trading operations.’”), available at www.sec.gov/litigation/admin/2011/33-9271.pdf (“Pipeline Settlement”); see also James B. Stewart, Barclays Suit Sheds Light on Trading in Shadows, The New York Times (July 4, 2014) (noting that “many dark pools initially banned high-frequency traders, who were viewed with suspicion on the public exchanges like the New York Stock Exchange”), available at www.nytimes.com/2014/07/05/business/barclays-suit-sheds-light-on-trading-in-the-shadows.html?_r=0; Jeremy Grant, Dark times for opaque trading platforms, Financial Times (June 26, 2014) (noting that “anks were driven by competitive pressure not only to have their own dark pools, but to make them even more HFT-proof than the next guy’s – to attract order flow”), available at www.ft.com/intl/cms/s/0/97810c5e-fd1c-11e3-8ca9-00144feab7de.html#axzz3r7a8driD.
[15] David Bogoslaw, Big Traders Dive Into Dark Pools, BloombergBusiness (Oct. 3, 2007) (noting that “lternative trading systems, or ATSs, have gained an increasing share of equity trading in the past few years,” and that “[m]ore recently, the motivation for using them has been the quantities of stock being traded and the ability to keep these transactions hidden—and anonymous.”), available at www.bloomberg.com/bw/stories/2007-10-03/big-traders-dive-into-dark-poolsbusinessweek-business-news-stock-market-and-financial-advice; The Dark Side of the Pools: What Investors Should Learn From Regulators’ Actions, 7-8, Healthy Markets (Sept. 15, 2015) (noting that “institutional investors have increasingly flocked to dark pools to avoid algorithmic traders that have become ever more effective at identifying and exploiting large orders”), available at static1.squarespace.com/static/5576334ce4b0c2435131749b/t/56213828e4b05c7f88ae68b3/1445017640977/DarkSideofthePoolsReport.pdf.
[16] See Pipeline Settlement (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order).
[17] See In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), available at www.sec.gov/litigation/admin/2015/33-9697.pdf; Max Colchester et al., Deutsche Bank, UBS Sucked Into Dark-Pools Trading Probe, The Wall Street Journal (July 30, 2014) (noting that both UBS and Deutsche Bank AG have disclosed that they are cooperating with various regulators on investigations into the role that high frequency traders play in these entities’ dark pools), available at www.wsj.com/articles/deutsche-bank-ubs-sucked-into-dark-pools-trading-probe-1406637594.
[18] See, e.g., In the Matter of ITG Inc. and Alternet Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12, 2015), available at www.sec.gov/litigation/admin/2015/33-9887.pdf; In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), available at www.sec.gov/litigation/admin/2015/33-9697.pdf; In the Matter of LavaFlow, Inc., Securities Exchange Act Release No. 72673 (Jul. 25, 2014), available at www.sec.gov/litigation/admin/2014/34-72673.pdf; In the Matter of Liquidnet, Inc., Securities Exchange Act Release No. 72339 (Jun. 6, 2014), available at www.sec.gov/litigation/admin/2014/33-9596.pdf; In the Matter of eBX, LLC, Securities Exchange Act Release No. 67969 (Oct. 3, 2012), available at www.sec.gov/litigation/admin/2012/34-67969.pdf; and Pipeline Settlement.
[19] See Pipeline Settlement. Upon the advice of counsel, Pipeline ultimately disclosed to “most of its customers the possibility of unspecified Pipeline affiliates trading on the Pipeline ATS.” Id. But Pipeline did not correct its misleading public statements that it had “no prop[rietary trading] desk gaming [customer] orders,” and that trading opportunities in the dark pool were furnished by other customers, and thus, were entirely “natural.” Id. Furthermore, Pipeline did not disclose that its affiliate executed the vast majority of trades on the Pipeline ATS, which was further inconsistent with its public statements. Id.
[20] Id.
[21] In the Matter of ITG Inc. and Alternet Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12, 2015), available at www.sec.gov/litigation/admin/2015/33-9887.pdf.
[22] Id.
[23] In the Matter of LavaFlow, Inc., Securities Exchange Act Release No. 72673 (July 25, 2014), available at www.sec.gov/litigation/admin/2014/34-72673.pdf.
[24] In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), available at www.sec.gov/litigation/admin/2015/33-9697.pdf.
[25] Id.
[26] John McCrank, Luminex 'dark pool' enlists 73 members ahead of trading launch, Reuters (Oct. 4, 2015)
(noting that “[t]he consortium that owns Luminex and collectively manages 40 percent of U.S. fund assets said it started the trading platform with the aim of lowering transaction costs and eliminating the types of profit driven conflicts of interest that have been seen in some existing venues”), available at www.reuters.com/article/2015/10/05/us-luminex-stocks-idUSKCN0RZ01I20151005#ccmW2syscx2gyUzf.97.
[27] Press Release, Luminex Trading, Luminex Successfully Commences Operations of Equity Trading Venue (Nov. 3, 2015), available at www.luminextrading.com/pdf/Luminex%20Launch%20Day%20Press%20Release%20vF%20-%2020151102.pdf; Robert Stowe England, Can Dark Pool Luminex Unlock Enough Liquidity for Block Trades?, Institutional Investor (May 29, 2015), available at www.institutionalinvestor.com/article/3458142/investors-endowments-and-foundations/can-dark-pool-luminex-unlock-enough-liquidity-for-block-trades.html?ArticleId=3458142&single=true#.VkKEO7czZpg.
[28] John McCrank, Luminex 'dark pool' enlists 73 members ahead of trading launch, Reuters (Oct. 4, 2015)
(noting that “[t]he consortium that owns Luminex and collectively manages 40 percent of U.S. fund assets said it started the trading platform with the aim of lowering transaction costs and eliminating the types of profit driven conflicts of interest that have been seen in some existing venues”), available at www.reuters.com/article/2015/10/05/us-luminex-stocks-idUSKCN0RZ01I20151005#ccmW2syscx2gyUzf.97.
[29] This figure has been reduced from reported figures to account for possible changes in assets under management since these investors last reported these figures. See Press Release, Nine Leading Investment Managers Join To Create Luminex, A New U.S. Equity Trading Venue, Luminex (Jan. 20, 2015) (listing assets under management for Luminex founders BNY Mellon, BlackRock, Fidelity, J.P. Morgan Asset Management, and T. Rowe Price of $1.6 trillion, $4.652 trillion, $2 trillion, $1.6 trillion, and $731.2 billion, respectively), available at luminextrading.com/pdf/nine_leading.pdf; Press Release, Invesco Ltd. Announces August 31, 2015 Assets Under Management, Invesco (Sept. 9, 2015) (reporting assets under management of $776.4 billion as of August 31, 2015), available at www.invesco.com/site/global/pdf/invest/media/press_releases/2015_09_09.pdf; Capital Group, Capital Group at a Glance (reporting assets under management of $1.397 trillion as of December 31, 2014), available at www.thecapitalgroup.com/our-company/news-room.html; State Street Global Advisors, Overview (reporting assets under management of $2.4 trillion as of March 31, 2015), available at www.ssga.com/global/en/about-us/who-we-are/overview.html.
[30] These disclosures would be required by Parts III and IV of proposed Form ATS-N. See Reg ATS Transparency Proposal.
[31] Id.
[32] Id. Importantly, ATSs would not be required to disclose personally identifiable information for employees and third parties who have access to confidential trade information. Id.
[33] See, Regulation of Non-Public Trading Interest, Securities Exchange Act Release No. 60997 (Nov. 13, 2009), available at www.sec.gov/rules/proposed/2009/34-60997.pdf. I have called for this previously. See Commissioner Luis A. Aguilar, U.S. Equity Market Structure: Making Our Markets Work Better for Investors (May 11, 2015), available at www.sec.gov/news/statement/us-equity-market-structure.html.
[34] The Dark Side of the Pools: What Investors Should Learn From Regulators’ Actions, Healthy Markets, 9 (Sept. 15, 2015), available at static1.squarespace.com/static/5576334ce4b0c2435131749b/t/56213828e4b05c7f88ae68b3/1445017640977/DarkSideofthePoolsReport.pdf; Truing the Block: A Framework for Re-architecting the Trader’s Toolkit, Tabb Group, 9 (2014), available at jonestrading.com/documents/TABB_TruingBlock.pdf
[35] Truing the Block: A Framework for Re-architecting the Trader’s Toolkit, Tabb Group, 3-4 (2014), available at jonestrading.com/documents/TABB_TruingBlock.pdf.
[36] Commissioner Luis A. Aguilar, U.S. Equity Market Structure: Making Our Markets Work Better for Investors (May 11, 2015) (noting that “everal studies have found that there may be a threshold beyond which additional fragmentation and dark trading can impair price discovery and overall market quality, and that this threshold can vary depending upon a stock’s market capitalization.”), available at www.sec.gov/news/statement/us-equity-market-structure.html.
[37] John Detrixhe and Jim Brunsden, European Dark-Pool Equity Trading Limits Won’t Work, Ferber Says, BloombergBusiness (Apr. 15, 2015), available at www.bloomberg.com/news/articles/2015-04-15/dark-pool-trading-limits-will-not-work-lawmaker-ferber-says. On December 6, 2014, the European Commission issued an updated Directive on Markets in Financial Instruments, known as MiFID II. Press Release, European Commission, New legislative framework for markets in financial instruments published in the Official Journal (Dec. 6, 2014), available at europa.eu/rapid/midday-express-12-06-2014.htm?locale=en. These new rules will, inter alia, limit the amount of transactions in equities that can be executed in dark platforms. These rules, however, contain an exclusion for large-in-scale trades, or block trading.
[38] Truing the Block: A Framework for Re-architecting the Trader’s Toolkit, Tabb Group, 3, 10 (2014) (noting that “ince block trading dropped off in 2007, many valiant attempts have been made through innovative platforms and technological initiatives to revive it. However, none of them led to a full recovery. In fact, just last year, the New York Block Exchange, a joint venture between NYSE Euronext and BIDS Holdings LP, folded. After opening in 2009, NYBX closed its doors just four years later because it was unable to gain ‘enough volume to achieve critical mass’ and furthermore did ‘not have strong support of customers.’”), available at jonestrading.com/documents/TABB_TruingBlock.pdf.
[39] Commissioner Luis A. Aguilar, Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair (Feb. 13, 2015) (noting that “ccording to Federal Reserve data, dealer inventories of municipal bonds have fallen by 65% since the end of 2007”), available at www.sec.gov/news/statement/making-municipal-securities-market-more-transparent-liquid-fair.html; Diminished Liquidity in the Corporate Bond Market: Implications for Fixed-Income Investors, 6 (Mar. 16, 2015) (noting that “we have seen a dramatic decline in the amount of corporate bonds held by the primary dealer community”), available at www.opco.com/trend-analysis/final_liquidity_report-031615.pdf.
Shedding Light on Dark Pools
Commissioner Luis A. Aguilar
Nov. 18, 2015
Today, the Commission considers proposing much-needed enhancements to the regulatory regime for alternative trading systems (“ATSs”) that trade national market system (“NMS”) stocks.[1] I will support these proposals because they could go a long way toward helping market participants make informed decisions as they attempt to navigate the byzantine structure of today’s equity markets.
The Role that ATSs Play in Our Markets Today
ATSs reportedly first appeared in the late 1960s, but they truly began to flourish after the Commission’s 2005 adoption of Regulation NMS.[2] Today, there are more than 40 active ATSs registered with the Commission,[3] and those that trade NMS stocks have, by some estimates, accounted for nearly 18% of all trading in those stocks at various times over the past two years.[4] That figure represents a more than fourfold increase since 2005, when ATSs accounted for roughly 4% of NMS stock trading.[5] In fact, some ATSs now execute a larger portion of consolidated volume than smaller exchanges do.[6] The ascendance of ATSs in recent years is the result of a confluence of factors, including a prolonged period of subdued market volatility[7] and the ability of ATSs to offer certain advantages, such as attractive fee structures, price improvements, and faster processing speeds, among others.[8]
Yet, perhaps the greatest catalyst for the rise of ATSs in recent years has been institutional investors’ growing need to trade large blocks of stock without causing markets to move against them.[9] This need is not new,[10] but it has become increasingly acute with the advent of algorithmic trading strategies and the diminished order sizes that have resulted.[11] ATSs responded to this need by offering ever more trading on an anonymous basis, and without displaying specific order information before trades occur.[12] These types of ATSs have come to be known as “dark pools.”[13]
Dark pools initially portrayed themselves as havens from predatory traders. They achieved this, in part, by excluding high frequency traders, who supposedly use brute speed to front-run institutional investors’ large orders.[14] Lured by this promise of safety, institutional traders embraced ATSs as a solution to their trading needs.[15] Unfortunately, all too often the safety these investors sought proved illusory.
Bad Things Can Happen in the Dark
Attracting sufficient liquidity to achieve critical mass has proven a continuous challenge for many dark pools. They have addressed this existential problem in various ways. For example, many dark pool operators have allowed their own proprietary trading desks to have access to their pools, while other operators have allowed their affiliates to trade within their pools.[16] And still other operators have given high-speed traders access to their dark pools,[17] all in an attempt to ensure that ATS subscribers will find counterparties for their trades as quickly and consistently as possible.
Setting aside the propriety of these approaches, their adoption suggests that the implacable need that dark pools have for liquidity has intensified certain conflicts of interest between them and their subscribers. The inability to properly manage these conflicts of interest has led the Commission to bring a number of enforcement actions against dark pool operators in recent years.[18] For example, in 2011, the Commission brought an enforcement action against one dark pool operator for falsely advertising that no proprietary trading took place in its dark pool.[19] In reality, one of the operator’s affiliates not only engaged in proprietary trading in the pool, but it also secretly enjoyed unfair informational advantages, which it used to front-run subscribers’ trades.[20]
The lesson from this case, however, apparently fell on deaf ears. For just a few months ago, the Commission settled another enforcement action against one of the oldest dark pool operators because it, too, had failed to disclose that it was engaged in proprietary trading within its pool.[21] That dark pool operator also gave its proprietary trading desk an unfair informational edge over other subscribers, despite guidance from the operator’s compliance department that this was improper.[22]
Of course, conflicts of interest come in many guises. For example, the Commission has brought enforcement actions against dark pools for failing to protect their subscribers’ confidential information.[23] And, just last year, the Commission brought an enforcement action against one operator of a large dark pool because, among other things, it secretly offered high speed traders special order types that gave them an unfair advantage over other subscribers.[24] Interestingly, this savvy dark pool operator knew how to play both sides of the fence. In addition to giving high frequency traders an unfair edge, this operator secretly allowed certain of its favored subscribers to avoid trading with those very same high frequency traders.[25]
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.[26] Bereft of regulatory intervention, these market participants seem to be taking matters into their own hands. Nine of the largest asset managers have banded together to form their own dark pool, one that is operated by and open exclusively to institutional investors.[27] According to reports, one of the goals of this new “buy-side institutions only” dark pool is to “eliminat[e] the types of profit driven conflicts of interest that have been seen in some existing venues.”[28] This action by buy-side investors with approximately $14 trillion in assets under management[29] seems to be a clear warning the markets aren’t working as well as they could, a warning that has gone unheeded for far too long.
Shining a Light on Dark Pools
A common thread running through the enforcement actions against dark pools is that market participants lack crucial information about how these ATSs function—and about the serious conflicts of interest they can harbor. Today, the Commission takes steps toward shedding much needed light onto dark pools by requiring certain ATSs to be more transparent, and by requiring them to undergo Commission review to ensure that they qualify for the exemption from registering as an exchange. The rules and amendments proposed today will require ATSs that trade most types of equities to furnish both investors and the Commission with much more detailed information about their operations. Importantly, 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.
For example, the proposal would require operators of covered ATSs to disclose whether they or any of their affiliates are submitting trades to the ATS, either on a proprietary basis or otherwise.[30] Covered ATSs would also be required to publicly disclose whether they or a subset of their subscribers enjoy any advantages over other subscribers, such as special order types and preferential access to trade information.[31] The proposal would also require covered ATSs to disclose their policies and procedures for ensuring the confidentiality of subscribers’ information, and these ATSs would also have to identify the positions of employees and third parties that have access to this information.[32]
The additional disclosures that would be required under today’s proposal will go a long way toward enabling investors and broker-dealers to make more informed decisions about which ATSs they may wish to route their orders to. But the Commission should not stop there. Instead, the Commission should give careful consideration to whether additional measures are warranted. For example, are the conflicts of interest confronting many ATSs so intractable that ATSs should simply be prohibited from engaging in any activity other than operating the ATS? In addition, the Commission should dust off its 2009 proposal regarding non-public trading, and determine whether the threshold for ATSs to display their orders should be lowered to account for their much larger role in today’s equity markets.[33]
Additionally, I hope that the Commission will examine whether Regulation ATS should be expanded to include platforms that trade government securities exclusively, and what information those entities should publicly disclose about their operations. The release includes questions on these and other important issues, and I urge commenters to weigh in with their views so that the Commission will be able to pursue new rules with the benefit of the knowledge, views, and experiences of a variety of market participants.
The Road Ahead
Looking more broadly at our evolving market structure, it seems clear that ATSs will continue to play an important role in the coming years. Yet, the precise contours of that role, and the implications it may hold for investors, are not immediately evident. In particular, I think the Commission should explore certain issues as it seeks to better oversee our markets.
First, given that the average trade sizes on dark pools that trade equities have fallen to the same levels as those seen on lit exchanges,[34] what is the future of block trading? Does that future differ for large-cap and smaller cap stocks? And does block trading need to be re-conceptualized to account for the algorithm-driven trading that dominates today’s markets? For example, should market participants redefine block trades as a percentage of average daily trading volume, rather than as a fixed number of shares?[35]
Second, can ATSs attract sufficient liquidity to remain viable without engaging in the types of misconduct that have given rise to the enforcement actions I mentioned earlier? Can ATSs survive without the participation of high frequency and other algorithmic traders? If not, can ATSs facilitate meaningful block trading?
Third, does the current regulatory structure favor the expansion of dark pools? If so, what does this portend for the complexity and fragmentation of our equity markets? Should the Commission consider limiting the growth of equity ATSs, especially if that growth begins to threaten the quality of price discovery, as some studies suggest it might?[36] Alternatively, should the Commission consider curbing the volume of orders that are executed in dark pools, as the second Directive on Markets in Financial Instruments, or MiFID II, will do for smaller orders in Europe?[37] In any case, I think the Commission should monitor this European experiment, and see what lessons can be drawn.
Fourth, are ATSs the best model to facilitate block trading? If not, what other approaches might fare better? Why have recent efforts to establish trading venues for block trades failed to return block trading to pre-financial crisis levels, despite clear interest from market participants to engage in such trades?[38]
And finally, can ATSs for fixed income securities potentially fill the vacuum created by the retrenchment of traditional broker-dealer activity in those markets?[39]
Clearly, the relentlessly changing nature of our capital markets requires the Commission to be a proactive participant, knowledgeable and informed as to market innovations and trends. The public is not well-served when the SEC lacks information or is merely a passive observer. Today’s proposed rules will enable the Commission, our staff, and the public to have better visibility into what has been a murky segment of the market.
Ultimately, an informed regulator is a more effective regulator, and an effective regulator is vital for investor confidence and market integrity.
Conclusion
In conclusion, I will vote to approve these proposed rules and amendments because they mark a significant step forward in the Commission’s efforts to enhance the oversight of ATSs that play a vital role in today’s equities markets. I remain mindful, however, that there is still much work to do to ensure that investors have access to the types of disclosures they need in order to make informed decisions.
Lastly, I would like to call attention to the efforts of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of General Counsel and to their hard work and diligence.
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[1] Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. XXXXX (Nov. 18, 2015) (File No. #####) (“Reg ATS Transparency Proposal”).
[2] Gary Shorter and Rena S. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developments, Congressional Research Service, 1, 5 (Sept. 16, 2014) (noting that ATSs first appeared in “the late 1960s” and that “Reg NMS is widely said to have helped advance [ATSs’] expansion by abolishing an earlier rule that protected manually submitted exchange (non-electronic) quotes, thus helping to foster more innovative electronic trading venues, including the dark pools.”), available at www.fas.org/sgp/crs/misc/R43739.pdf; David Bogoslaw, Big Traders Dive Into Dark Pools, BloombergBusiness (Oct. 3, 2007) (noting that “lternative trading systems, or ATSs, have gained an increasing share of equity trading in the past few years,” and that “[m]ore recently, the motivation for using them has been the quantities of stock being traded and the ability to keep these transactions hidden—and anonymous.”), available at www.bloomberg.com/bw/stories/2007-10-03/big-traders-dive-into-dark-poolsbusinessweek-business-news-stock-market-and-financial-advice; Leslie Boni et al., Dark Pool Exclusivity Matters, 2 (May 2012), available at www.bankofcanada.ca/wp-content/uploads/2012/11/David-Brown.pdf; Richard Henderson, Judgment day approaches for Reg NMS, The Trade News (May 14, 2013), available at www.thetradenews.com/Regions/Americas/Judgement-day-approaches-for-Reg-NMS/.
[3] See ATS Transparency Data Quarterly Statistics, Third Quarter of 2015 FINRA, available at www.finra.org/industry/ats/ats-transparency-data-quarterly-statistics; see also Alternative Trading Systems with Form ATS on File with the SEC as of October 1, 2015, Securities and Exchange Commission (Oct. 1, 2015) (listing 86 ATSs registered with the Commission), available at www.sec.gov/foia/ats/atslist1015.pdf. Of the more than 40 active ATSs, 38 currently trade NMS stocks. See Reg ATS Transparency Proposal.
[4] See Regulation Systems Compliance and Integrity, Securities Exchange Act Release No. 73639, p.55 (Nov. 19, 2014) (noting that “based on data collected from ATSs pursuant to FINRA Rule 4552 for 18 weeks of trading in 2014, the trading volume of ATSs accounted for approximately 18 percent of the total dollar volume in NMS stocks, with no individual ATS executing more than five percent”), available at www.sec.gov/rules/final/2014/34-73639.pdf; The Dark Side of the Pools: What Investors Should Learn From Regulators’ Actions, Healthy Markets, 7-8 (Sept. 15, 2015) (citing September 2015 statistics from Rosenblatt Securities, which show that ATSs trading accounted for just under 18 percent of all consolidated volume during certain periods of 2015), available at static1.squarespace.com/static/5576334ce4b0c2435131749b/t/56213828e4b05c7f88ae68b3/1445017640977/DarkSideofthePoolsReport.pdf.
[5] Scott Patterson, ‘Dark Pools’ Face Scrutiny, The Wall Street Journal (June 5,2013), available at www.wsj.com/articles/SB10001424127887324069104578527361102049152; A Guide to High-Frequency Trading (HFT), Wall Street Week (July 19, 2015) (noting that “n 2005, prior to the implementation of Reg NMS, dark pools only made up 3-5% of volume in the market. Today that number is around 15-18% on most days and continues to grow.”), available at wallstreetweek.com/read/a-guide-to-high-frequency-trading-hft/.
[6] Regulation Systems Compliance and Integrity, Securities Exchange Act Release No. 73639 (Nov. 19, 2014), available at www.sec.gov/rules/final/2014/34-73639.pdf.
[7] Volatility stirs, markets unshaken, BIS Quarterly Review (Sept. 14, 2014) (characterizing the period following the financial crisis as “a prolonged period of unusual tranquility” and, hence, low volatility, in the markets), available at www.bis.org/publ/qtrpdf/r_qt1409a.htm. When markets experience bouts of extreme volatility, dark pools typically experience declines in their trade volume because, in those situations, traders are generally more concerned with ensuring that their transactions will be completed in a timely manner, and are less willing to wait for the best price to emerge from a dark pool. See, e.g., Sam Mamudi, Dark Pools Were the Losers as U.S. Markets Saw Volume Spurt, BloombergBusiness (Aug. 24, 2015), available at www.bloomberg.com/news/articles/2015-08-24/dark-pools-are-the-losers-as-exchanges-get-huge-volume-from-rout. Although the period following the financial crisis has generally been a calm one, there have been exceptions. Over the past few years, markets have experienced several short-lived episodes of heightened volatility. In fact, this past summer alone witnessed two sharp spikes in volatility, first in July, when the Greek debt crisis came to a head, and again the following month, when fears that China’s economic growth had slowed markedly became widespread. See Sinead Carew, Wall St. tumbles as investors flee equities on Greek debt crisis, Reuters (June 29, 2015), available at www.reuters.com/article/2015/06/29/us-markets-stocks-idUSKCN0P91NO20150629; Sam Mamudi, Dark Pools Were the Losers as U.S. Markets Saw Volume Spurt, BloombergBusiness (Aug. 24, 2015), available at www.bloomberg.com/news/articles/2015-08-24/dark-pools-are-the-losers-as-exchanges-get-huge-volume-from-rout.
[8] Gary Shorter and Rena S. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developments, Congressional Research Service, 4-5 (Sept. 16, 2014), available at www.fas.org/sgp/crs/misc/R43739.pdf.
[9] David Bogoslaw, Big Traders Dive Into Dark Pools, BloombergBusiness (Oct. 3, 2007) (noting, in 2007, that “[t]rading huge quantities of stock on traditional exchanges has become ever more challenging, costly, and potentially disruptive. And if other players see your moves, they can disrupt your trades. That's led to the emergence in recent years of alternative trading systems known as dark pools.”), available at www.bloomberg.com/bw/stories/2007-10-03/big-traders-dive-into-dark-poolsbusinessweek-business-news-stock-market-and-financial-advice.
[10] Maura McDermott, Shadows fall over dark pool trading practices, Financial Times (Dec. 18, 2011), available at www.ft.com/intl/cms/s/0/4a2000bc-24b3-11e1-ac4b-00144feabdc0.html.
[11] Equity Market Structure Literature Review Part II: High Frequency Trading, Division of Trading and Markets, Securities and Exchange Commission, (Mar. 18, 2014) (noting that “HFT proxies include high message rates, bursts of order cancellations and modifications, high order-to-trade ratios, small trade sizes, and increases in trading speed. These proxies generally are associated with the broader phenomena of algorithmic trading and computer-assisted trading in all their forms”), available at www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
[12] See Christopher Mercurio, Dark Pool Regulation, 33 Review of Banking and Financial Law 69 (2013)(noting that “[d]ark pool trading has steadily increased in market share over the past five years”), available at www.bu.edu/rbfl/files/2014/03/RBFL-V.-33_1_Mercurio.pdf; Reg ATS Transparency Proposal (noting that “
[13] Haoxiang Zhu, Do Dark Pools Harm Price Discovery?, 2 (Nov. 16, 2013), available at www.mit.edu/~zhuh/Zhu_darkpool.pdf; Tom Winter, Gazing Into 'Dark Pools,' the Tool that Enables Anonymous Insider Trading, CNBC (Jan. 23, 2013) (noting that “[w]hile all exchanges have a degree of anonymity, dark pools have an increased level of secrecy because neither the size of the trade nor the identity of the participants are revealed until a trade is filled”), available at www.cnbc.com/id/100400981.
[14] See, e.g., In the Matter of Pipeline Trading Systems LLC et al., Exchange Act Release No. 65609, 10 (Oct. 24, 2011) (noting that “n press releases and other marketing materials issued in 2008 and 2009, Pipeline stated that its ATS provided protection against ‘statistical arbitrageurs’ and ‘high-frequency trading operations.’”), available at www.sec.gov/litigation/admin/2011/33-9271.pdf (“Pipeline Settlement”); see also James B. Stewart, Barclays Suit Sheds Light on Trading in Shadows, The New York Times (July 4, 2014) (noting that “many dark pools initially banned high-frequency traders, who were viewed with suspicion on the public exchanges like the New York Stock Exchange”), available at www.nytimes.com/2014/07/05/business/barclays-suit-sheds-light-on-trading-in-the-shadows.html?_r=0; Jeremy Grant, Dark times for opaque trading platforms, Financial Times (June 26, 2014) (noting that “anks were driven by competitive pressure not only to have their own dark pools, but to make them even more HFT-proof than the next guy’s – to attract order flow”), available at www.ft.com/intl/cms/s/0/97810c5e-fd1c-11e3-8ca9-00144feab7de.html#axzz3r7a8driD.
[15] David Bogoslaw, Big Traders Dive Into Dark Pools, BloombergBusiness (Oct. 3, 2007) (noting that “lternative trading systems, or ATSs, have gained an increasing share of equity trading in the past few years,” and that “[m]ore recently, the motivation for using them has been the quantities of stock being traded and the ability to keep these transactions hidden—and anonymous.”), available at www.bloomberg.com/bw/stories/2007-10-03/big-traders-dive-into-dark-poolsbusinessweek-business-news-stock-market-and-financial-advice; The Dark Side of the Pools: What Investors Should Learn From Regulators’ Actions, 7-8, Healthy Markets (Sept. 15, 2015) (noting that “institutional investors have increasingly flocked to dark pools to avoid algorithmic traders that have become ever more effective at identifying and exploiting large orders”), available at static1.squarespace.com/static/5576334ce4b0c2435131749b/t/56213828e4b05c7f88ae68b3/1445017640977/DarkSideofthePoolsReport.pdf.
[16] See Pipeline Settlement (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order).
[17] See In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), available at www.sec.gov/litigation/admin/2015/33-9697.pdf; Max Colchester et al., Deutsche Bank, UBS Sucked Into Dark-Pools Trading Probe, The Wall Street Journal (July 30, 2014) (noting that both UBS and Deutsche Bank AG have disclosed that they are cooperating with various regulators on investigations into the role that high frequency traders play in these entities’ dark pools), available at www.wsj.com/articles/deutsche-bank-ubs-sucked-into-dark-pools-trading-probe-1406637594.
[18] See, e.g., In the Matter of ITG Inc. and Alternet Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12, 2015), available at www.sec.gov/litigation/admin/2015/33-9887.pdf; In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), available at www.sec.gov/litigation/admin/2015/33-9697.pdf; In the Matter of LavaFlow, Inc., Securities Exchange Act Release No. 72673 (Jul. 25, 2014), available at www.sec.gov/litigation/admin/2014/34-72673.pdf; In the Matter of Liquidnet, Inc., Securities Exchange Act Release No. 72339 (Jun. 6, 2014), available at www.sec.gov/litigation/admin/2014/33-9596.pdf; In the Matter of eBX, LLC, Securities Exchange Act Release No. 67969 (Oct. 3, 2012), available at www.sec.gov/litigation/admin/2012/34-67969.pdf; and Pipeline Settlement.
[19] See Pipeline Settlement. Upon the advice of counsel, Pipeline ultimately disclosed to “most of its customers the possibility of unspecified Pipeline affiliates trading on the Pipeline ATS.” Id. But Pipeline did not correct its misleading public statements that it had “no prop[rietary trading] desk gaming [customer] orders,” and that trading opportunities in the dark pool were furnished by other customers, and thus, were entirely “natural.” Id. Furthermore, Pipeline did not disclose that its affiliate executed the vast majority of trades on the Pipeline ATS, which was further inconsistent with its public statements. Id.
[20] Id.
[21] In the Matter of ITG Inc. and Alternet Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12, 2015), available at www.sec.gov/litigation/admin/2015/33-9887.pdf.
[22] Id.
[23] In the Matter of LavaFlow, Inc., Securities Exchange Act Release No. 72673 (July 25, 2014), available at www.sec.gov/litigation/admin/2014/34-72673.pdf.
[24] In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), available at www.sec.gov/litigation/admin/2015/33-9697.pdf.
[25] Id.
[26] John McCrank, Luminex 'dark pool' enlists 73 members ahead of trading launch, Reuters (Oct. 4, 2015)
(noting that “[t]he consortium that owns Luminex and collectively manages 40 percent of U.S. fund assets said it started the trading platform with the aim of lowering transaction costs and eliminating the types of profit driven conflicts of interest that have been seen in some existing venues”), available at www.reuters.com/article/2015/10/05/us-luminex-stocks-idUSKCN0RZ01I20151005#ccmW2syscx2gyUzf.97.
[27] Press Release, Luminex Trading, Luminex Successfully Commences Operations of Equity Trading Venue (Nov. 3, 2015), available at www.luminextrading.com/pdf/Luminex%20Launch%20Day%20Press%20Release%20vF%20-%2020151102.pdf; Robert Stowe England, Can Dark Pool Luminex Unlock Enough Liquidity for Block Trades?, Institutional Investor (May 29, 2015), available at www.institutionalinvestor.com/article/3458142/investors-endowments-and-foundations/can-dark-pool-luminex-unlock-enough-liquidity-for-block-trades.html?ArticleId=3458142&single=true#.VkKEO7czZpg.
[28] John McCrank, Luminex 'dark pool' enlists 73 members ahead of trading launch, Reuters (Oct. 4, 2015)
(noting that “[t]he consortium that owns Luminex and collectively manages 40 percent of U.S. fund assets said it started the trading platform with the aim of lowering transaction costs and eliminating the types of profit driven conflicts of interest that have been seen in some existing venues”), available at www.reuters.com/article/2015/10/05/us-luminex-stocks-idUSKCN0RZ01I20151005#ccmW2syscx2gyUzf.97.
[29] This figure has been reduced from reported figures to account for possible changes in assets under management since these investors last reported these figures. See Press Release, Nine Leading Investment Managers Join To Create Luminex, A New U.S. Equity Trading Venue, Luminex (Jan. 20, 2015) (listing assets under management for Luminex founders BNY Mellon, BlackRock, Fidelity, J.P. Morgan Asset Management, and T. Rowe Price of $1.6 trillion, $4.652 trillion, $2 trillion, $1.6 trillion, and $731.2 billion, respectively), available at luminextrading.com/pdf/nine_leading.pdf; Press Release, Invesco Ltd. Announces August 31, 2015 Assets Under Management, Invesco (Sept. 9, 2015) (reporting assets under management of $776.4 billion as of August 31, 2015), available at www.invesco.com/site/global/pdf/invest/media/press_releases/2015_09_09.pdf; Capital Group, Capital Group at a Glance (reporting assets under management of $1.397 trillion as of December 31, 2014), available at www.thecapitalgroup.com/our-company/news-room.html; State Street Global Advisors, Overview (reporting assets under management of $2.4 trillion as of March 31, 2015), available at www.ssga.com/global/en/about-us/who-we-are/overview.html.
[30] These disclosures would be required by Parts III and IV of proposed Form ATS-N. See Reg ATS Transparency Proposal.
[31] Id.
[32] Id. Importantly, ATSs would not be required to disclose personally identifiable information for employees and third parties who have access to confidential trade information. Id.
[33] See, Regulation of Non-Public Trading Interest, Securities Exchange Act Release No. 60997 (Nov. 13, 2009), available at www.sec.gov/rules/proposed/2009/34-60997.pdf. I have called for this previously. See Commissioner Luis A. Aguilar, U.S. Equity Market Structure: Making Our Markets Work Better for Investors (May 11, 2015), available at www.sec.gov/news/statement/us-equity-market-structure.html.
[34] The Dark Side of the Pools: What Investors Should Learn From Regulators’ Actions, Healthy Markets, 9 (Sept. 15, 2015), available at static1.squarespace.com/static/5576334ce4b0c2435131749b/t/56213828e4b05c7f88ae68b3/1445017640977/DarkSideofthePoolsReport.pdf; Truing the Block: A Framework for Re-architecting the Trader’s Toolkit, Tabb Group, 9 (2014), available at jonestrading.com/documents/TABB_TruingBlock.pdf
[35] Truing the Block: A Framework for Re-architecting the Trader’s Toolkit, Tabb Group, 3-4 (2014), available at jonestrading.com/documents/TABB_TruingBlock.pdf.
[36] Commissioner Luis A. Aguilar, U.S. Equity Market Structure: Making Our Markets Work Better for Investors (May 11, 2015) (noting that “
[37] John Detrixhe and Jim Brunsden, European Dark-Pool Equity Trading Limits Won’t Work, Ferber Says, BloombergBusiness (Apr. 15, 2015), available at www.bloomberg.com/news/articles/2015-04-15/dark-pool-trading-limits-will-not-work-lawmaker-ferber-says. On December 6, 2014, the European Commission issued an updated Directive on Markets in Financial Instruments, known as MiFID II. Press Release, European Commission, New legislative framework for markets in financial instruments published in the Official Journal (Dec. 6, 2014), available at europa.eu/rapid/midday-express-12-06-2014.htm?locale=en. These new rules will, inter alia, limit the amount of transactions in equities that can be executed in dark platforms. These rules, however, contain an exclusion for large-in-scale trades, or block trading.
[38] Truing the Block: A Framework for Re-architecting the Trader’s Toolkit, Tabb Group, 3, 10 (2014) (noting that “
[39] Commissioner Luis A. Aguilar, Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair (Feb. 13, 2015) (noting that “ccording to Federal Reserve data, dealer inventories of municipal bonds have fallen by 65% since the end of 2007”), available at www.sec.gov/news/statement/making-municipal-securities-market-more-transparent-liquid-fair.html; Diminished Liquidity in the Corporate Bond Market: Implications for Fixed-Income Investors, 6 (Mar. 16, 2015) (noting that “we have seen a dramatic decline in the amount of corporate bonds held by the primary dealer community”), available at www.opco.com/trend-analysis/final_liquidity_report-031615.pdf.
