SEC to Tighten Regulation for Dark Pools

The US regulator voted unanimously to enhance the operational transparency and regulatory oversight on dark pools.

The Securities and Exchange Commission announced on Wednesday that it would amend regulation regarding alternative trading systems (ATSs). The changes focus on ATSs that trade stocks on a national securities exchange and aim enhance the operational transparency and regulatory oversight of them.

The regulation, which was passed on Wednesday on a unanimous vote, follows numerous enforcement actions that found some ATSs, otherwise known as dark pools, misled clients about their operations. This included giving special access to high-speed traders.

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The changes to Regulation ATS require dark pools, which are private trading platforms run by brokerage firms that don’t disclose pre-trade prices, to file detailed public disclosures on the new Form ATS-N.

This will require dark pools to provide significantly more information than what they are currently obligated to do so and will allow market participants to assess any potential conflicts of interests and risks.

Furthermore, the information provided on the file will inform market participants of their operations. This will include order types and market data on the ATS, plus detail any fees, the dark pool’s execution and priority procedures, and any procedures to segment orders on the ATS.

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According to the statement released by the watchdog, all dark pools will be required to have safeguards and procedures in place to protect their clients confidential trading information. All Forms ATS-N will be publicly available on the SEC’s website.

In addition, as part of the changes, a process for the Commission to review Form ATS-N filings and, after notice, declare a Form ATS-N ineffective will also be established.

Tightening regulations

The amendments to regulation surrounding dark pools is not a huge surprise. This is because, since 2011, banks and brokers have paid more than $229 million in fines to regulators where the wrongdoing involved dark pools.

In addition, the role of dark pools has been growing. According to data from Tabb Group, ATSs accounted for 12.8 percent of average daily trading volume in May this year. With these changes, dark pools are now moving closer to the regulatory requirements of stock exchanges.

Commenting on the amendments, SEC Chairman Jay Clayton said: “I applaud the staff’s retrospective review of our regulation of ATSs. I agree that promoting greater transparency in order interaction, matching, and execution will help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives.”

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