Published April 16, 2013
NEW YORK – The chief executives of three major U.S. stock exchanges have called on regulators to take steps to reduce trading taking place away from public exchanges, saying the opaque practice is hurting market quality.
Departing Securities and Exchange Chairwoman Elisse Walter, along with SEC staff members, met with Nasdaq OMX CEO Bob Greifeld, NYSE Euronext CEO Duncan Niederauer and BATS Global Markets CEO Joe Ratterman on April 9, according to a SEC filing dated April 10.
(For the filing, see: http://link.reuters.com/gen47t)
The exchanges made the case that higher off-exchange trading volumes are hurting market quality by creating wider trading spreads and increased intraday volatility, according to a copy of their presentation copied in the filing.
The meetings highlight a growing sense of urgency at the exchanges about the increasing amount of trading by-passing their venues and going instead to so-called dark pools and internalizers.
Dark pools are trading platforms where buyers and sellers of stocks remain anonymous and their orders are hidden until they are executed. Internalizers are brokers that match orders within their own firms, allowing them to avoid exchange fees.
The exchanges have long argued that the rise of off-exchange trading distorts prices in the public markets and makes the markets in general less transparent.
The exchanges pointed to rules in Canada implemented in October that require dark pools to offer meaningful improvement on the prices quoted on the public markets, or to require a minimum size threshold for off-exchange orders.
The result has been a 25 percent decline in the quoted spread and a 17 percent decline in volatility, based on Canadian market data, the exchanges said.
An Australian task force looking at off-exchange trading in that country said the practice is impairing market quality, and regulators there are considering similar rules to those in Canada.
"While holistic reform may also be warranted, we believe this is the time to introduce an obligation in order to trade based on the publicly quoted trade price," the exchanges told the SEC.
The dark pool and internalizers' practices also affect the exchanges' bottom lines.
Off-exchange venues, not including electronic communication networks, made up 38 percent of U.S. trading volume in February, according to data from research firm Tabb Group.
Supporters of dark pools argue that the competition the trading venues provide to exchanges has the effect of keeping trading costs in check and costs could be higher without that.
There are around 50 dark pools in the United States and 13 public exchanges. Some of the largest U.S. dark pools are run by banks that are also some of the exchanges' largest customers. They include Credit Suisse Group AG's CrossFinder, Morgan Stanley's MS Pool and Citigroup Inc's Citi Match.
Incoming SEC Chairwoman Mary Jo White, who was sworn in on Wednesday, said in her Senate confirmation hearing in March that the agency should continue to explore the effects of dark pools, along with other issues, such as high-frequency trading and the proliferation of order types on exchanges.
White, a lawyer and former federal prosecutor, was a director on Nasdaq's board from May 2002 until February 2006.
(Reporting By John McCrank; Editing by Kenneth Barry)