Expect Widespread "Pinging" in Dark Pools with SEC's IOI Proposal
Traders Magazine Online News, January 14, 2010
Peter Chapman
A Securities and Exchange Commission proposal intended to limit brokers' off-board trading is unlikely to drive more orders to the public markets, industry officials contend.
Instead, the rules, which target brokers' use of "actionable" indications of interest, will most likely force brokers to "blind ping" each others' dark pools, execs say.
As part of the SEC's "Regulation of Non-Public Trading Interest" proposal, issued in mid-November, the regulator is suggesting two new rules that could sharply curtail brokers' use of so-called actionable indications of interest. That, it hopes, would force the brokers to convert the IOIs into orders and send them to the exchanges.
The SEC is primarily targeting operators of dark pool alternative trading systems who transmit trading messages electronically to other dark pools and hidden sources of liquidity. But any rule changes would also affect exchanges and over-the-counter market makers. The regulator says it has identified 11 of 29 dark pool ATSs that use actionable IOIs.
While many brokers agree on the need for rules governing actionable IOIs, they don't think the changes will lead to more quoting in the public markets. That's because the messages are used to service clients seeking anonymity and to avoid costly exchange fees.
"Anyone who believes these new rules will result in new information being made public is kidding himself," said Kevin Foley, chief executive of Aqua, an operator of a dark pool ATS. "Behavior will simply change." (Aqua transmits "orders," but not actionable IOIs, Foley explained, and is therefore not subject to the proposed rule changes.)
