SEC Trading Official Lays Out Concerns About Dark Pools, Transparency, Fragmentation

By: Ray Pellecchia

File Under: NYSE, NYSE Amex, NYSE Arca, NYSE Euronext

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Traders magazine reports that at a conference today, James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, "laid out a series of broad concerns about dark pools in the U.S. equity markets." Excerpts:

"To the extent that desirable order flow is diverted from the public markets, it potentially could adversely affect the execution quality of those market participants who display their orders in the public markets," he said. Brigagliano added that anything that "significantly detracts from the incentives to display liquidity in the public markets could decrease that liquidity and, in turn, harm price discovery and worsen short-term volatility." ...

... "I'd like to give you specific statistics on the trading volume [of dark pools]," he told the crowd, "but there's very little reliable public information on dark-pool trading activity." ... To remedy this, the SEC, Brigagliano suggested, may impose post-trade reporting requirements on dark pools. "While full pre-trade darkness is an important element of the business models of some dark pools, it does not appear that some form of improved post-trade transparency would be likely to interfere with those business models," he said. ... "

In addition to concerns about price discovery and accurate trade reporting, Brigagliano targeted indications of interest sent between dark pools as another potential concern for regulators. These automated IOI messages, which usually are executable and for small size, are sent to seek liquidity from other dark pools to increase the original pool's executions. The widespread use of these "actionable order messages could create the potential for significant private markets to develop that exclude public investors," Brigagliano said. He added that these actionable order messages could affect competition among trading centers and contribute to market fragmentation by making consolidation efforts among dark pools less likely.

In his comments, Brigagliano differentiated between block crossing systems that execute large orders for institutions and dark pools that trade small-size orders. ...

Read Traders' full account here. Your thoughts, as always, are welcome in the comment box below.