Anonymity of trader and origin of order flow has played a significant part in the advantages gained by algorithmic and high frequency traders across the entire electronic trading scope by way of the use of dark liquidity, a medium upon which regulatory and corporate opinion varies considerably, ranging from acquiescent acceptance to outright disdain.
North America, home to a series of highly prestigious institutional trading desks, some of the world’s most prominent and highly advanced executing venues and important proprietary trading desks in New York and Chicago, the regulator which presides over the financial services industry in the United States has taken a step against the use of dark liquidity, but has done so via an unusual method.
As part of the Financial Industry Regulatory Authority (FINRA)’s effort to increase market transparency and thereby enhance investor confidence, FINRA today began providing data indicating the activity levels in each alternative trading system (ATS), including all market facilities commonly called dark pools. This important information will shed light on the securities that are traded in each dark pool, which occurs away from traditional stock exchanges. While the trades in these facilities are made available on a real-time basis to investors and professionals today through securities information processors (SIPs), these trades are not attributed to a specific ATS or “dark pool.”
Under FINRA’s new transparency initiative, the public will now be able to see the total shares traded each week by security in each ATS or “dark pool.” This data will be provided to the non-professional investing public free of charge and is available through FINRA’s website. ATSs account for a significant percentage of total OTC trading in exchange-listed equities in the United States. Currently over 30 percent of the total National Market System volume of shares traded occurs over the counter.
“FINRA hopes that providing a clear view of the level of activity handled by these ATSs or ‘dark pools’ will increase market transparency and thereby enhance investor confidence. FINRA’s commitment to transparency is bringing light to what was previously a dark area of the equity markets. Making this information available to both the investing public and market participants provides an unprecedented view into the activity of these highly significant trading venues,” said Steven Joachim, FINRA Executive Vice President, Transparency Services.
Each ATS is required to report to FINRA its weekly aggregate volume information on a security-by-security basis. FINRA will publish the information regarding Tier 1 NMS stocks (i.e., stocks in the S&P 500 Index, the Russell 1000 Index and certain ETPs) on a two-week delayed basis. Information on all other NMS stocks and OTC equity securities subject to FINRA trade reporting requirements will be released two weeks following the publication of information for the Tier 1 NMS stocks.
The information from ATS reports that FINRA is making available today were filed for the week of May 12 through May 18, 2014. The ATS reports were due to FINRA by May 28, 2014. Under a typical reporting scenario (i.e., no federal holidays), each ATS is required to report the information for a given week seven (7) business days following the week. FINRA will publish the information regarding Tier 1 NMS stocks no earlier than the following Monday.
Dark pools for use in spot FX trading had recently gained ground, despite the European Commission’s wish to eradicate high frequency trading and stem the use of algorithms, exemplified by last year’s connection of the world’s largest dark pool, UBS Multilateral Trading Facility to TMX Atrium’s connectivity network, ironically a North American carrier, and Australian regulator ASIC having declared dark liquidity to be part of the financial landscape, having designed a series of rulings surrounding HFT, dark pools and use of algorithms, alluding to potentially good business relationships between Australian firms and the nearby institutional FX epicenters of Hong Kong and Singapore.
Prior to FINRA making this data generally available, ATS volume has been provided primarily to professionals, based on voluntary reporting by some (but not all) ATSs, on an aggregate, monthly basis. FINRA’s collection of the data under its rule is designed to ensure that the data reported is complete and accurate, and by making the data available on a weekly, symbol-by-symbol basis, provides a new level of transparency that may be reviewed and studied by non-professional and professional traders, academics and regulators.