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Will Spotlight Be Placed on Dark Pools?

The Financial Industry Regulatory Authority (FINRA) is considering new rules that would require additional reporting requirements for dark pool trades made by broker-dealers.  This announcement was made recently by Richard G. Ketchum, chief executive officer of FINRA, largely in response to Credit Suise Group AG’s decision to stop sharing data on the volume of its trades.  Credit Suisse currently operates the largest U.S. dark pool.

“Dark pools” is the name given to networks that allow traders to buy or sell large orders off of an exchange, and without the prices being revealed publicly, until after trades are completed.   Dark pools allow traders to avoid moving stock prices by keeping their intentions quiet.  However since trades done inside and between other dark pools are not immediately disclosed, and the identities of the parties involved are not revealed, there is concern that this practice allows traders to manipulate stock prices and causes inefficiency of pricing in traditional stock exchanges. 

Under current reporting rules, FINRA is not able to identify trades that happen in a particular dark pool with any certainty.  This is due to the fact that brokers operating dark pools use a single identifier for all activity.  FINRA had allowed such reporting to be made voluntarily, but the lack of reporting activity is forcing FINRA to consider mandatory rules.  If passed, the proposed rules would implement requirements that brokers distinguish trades that occur in dark pools from ones that don’t by assigning separate identifiers to indicate trades filled in dark pools.  Doing so would allow FINRA to publish figures for how much trading occurs in every dark pool.  This type of rule would need approval by the Securities and Exchange Commission (SEC) before taking effect, and as such, FINRA is expected to submit their proposal to the SEC this summer.

For further information on this, or other related topics, please contact us at [email protected] or (619)298-2880.

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