NYSE Euronext (NYX) CEO Duncan Niederauer wants the Securities and Exchange Commission to act on a rulemaking proposal from 2009 that seeks to improve transparency in “dark pools.” Testifying in front of a House Financial Services Committee panel, Niederauer talked about how the dramatic increase in off-exchange trading has resulted in a U.S. equity market structure that continues to become more bifurcated. During the June 20 hearing, held by the committee’s Capital Markets Subcommittee, participants looked at the U.S. equity market structure and how it affects competition and innovation.
Dark pools, which are off-exchange private trading venues that don’t show quotes to the public, are involved in about 15% of off-exchange trading. It was in 2009, even before the flash crash of May 6, 2010 that the SEC issued a proposal that would expose dark pools by making certain actionable order information subject to SEC quoting requirements. (The proposal also would substantially reduce the threshold volume that activates public display obligations for ATSs from 5% to .25%.)
At the hearing, Niederauer pressed regulators and policy makers to even matters out between alternative trading systems and exchanges, while recommending the fair distribution across all trading pools of regulatory costs. He also suggested that national exchanges be given permission to avail of lighter disclosure requirements under Regulation ATS (Alternative Trading System), which regulates non-exchange trading venues.
Niederauer talked about how the NYSE would also like to compete. He said that instead of making alternative trading venues deal with the SEC process, exchanges should be given the same advantages that Reg ATS-regulated entities get to avail of. Not everyone agreed with him. Knight Capital Group Inc. CEO and Chairman Thomas Joyce cautioned that trying to even out the playing field between brokerage firms and exchanges is a matter of “apples and oranges,” especially considering that they don’t have the same requirements and needs. He also spoke about how dark pools are used by institutional investors to make large trades without impacting quoted prices. Meantime, Invesco equity trading global head Kevin Cronin, who testified for Investment Company Institute, talked about how institutional investors depend on dark pool to protect their trades.
Cronin also weighed in on the issue SEC’s study of tick size, which is the tiniest increment that a stock price can move by. (The tick size for US equity markets is $.01.) He is recommending that a wide-ranging pilot program be set up to look at the varying minimum spreads in all kinds of stocks and that this would drum up valuable data that the Commission could use to decide whether there should be changes made to tick sizes. Niederauer said that NYSE should be in charge of the pilot project and coordinate with interested issuers.
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House Committee on Financial Services
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