Tuesday, April 09, 2013

Australian Securities Commission Proposes Regulation of Dark Pools

The Australian Securities and Investments Commission proposed regulations for dark pools, which are electronic trading systems that do not display public quotes. A key component of the regulatory regime is the adoption of minimum size threshold for dark orders for a security or group of securities. This would involve monitoring the relevant trigger on a quarterly basis to determine when to increase the minimum size threshold; not permitting the aggregation of orders to meet the threshold; and periodically reviewing the categories and thresholds in consultation with industry. Market participants would not be permitted to aggregate orders to meet the minimum size threshold since this would undermine its purpose.

The Commission proposes two alternative triggers for the minimum size threshold. The first trigger would apply when dark liquidity, excluding block size trades, for a security exceeds 10 percent, there is a 4 percent increase in the pre-trade transparent quoted spreads for that security, and there is a 15 percent decrease in the depth at the top five price points for that security. Alternatively, the minimum size threshold would apply when dark liquidity, excluding block size trades, for a security exceeds 10 percent; there is a 20 percent increase in the pre-trade transparent quoted spread for that security; and there is a 20 percent decrease in the depth at the top five price points for that security.

A crossing system is currently defined in the ASIC Market Integrity Rules as any automated service provided by a participant to its clients which matches or executes client orders with orders of the participant or other clients of the participant, otherwise than on an Order Book. As part of the proposed dark pool regulations, crossing system operators would be required to make information about their crossing system publicly available, disclose to users information about user obligations, execution risk and the operation of the crossing system, and have a common set of procedures which appropriately balance the interests of all users and do not unfairly discriminate between users. Also, the regulations would allow users to opt out of a crossing system at no additional cost, and with no additional operational or administrative requirements. Crossing systems would also have to maintain records of all orders that enter a crossing system.

In the U.S., the SEC has become increasingly concerned about the post-trade transparency of dark pools. SEC officials have noted that this lack of post-trade transparency can make it difficult for the public to assess dark pool trading volume and evaluate which ones may have liquidity in particular stocks. Last year, the Senate Securities Subcommittee examined alternative trading systems and dark pools amidst a growing consensus that holistic market regulatory reforms are needed to address increasingly electronic and complex securities markets. Chairman Jack Reed (D-RI) questioned if current market regulations reflect the reality of the current market structure. Senator Kay Hagen (D-NC) also expressed concern with the dramatic increase in dark pool trading, which now accounts for 14 percent of trades. Senator Hagen perceives a lack of transparency in dark pool trading.

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