Wall Street Dark Pools to Come Out of Shadows Thanks to SEC


(Bloomberg) -- Wall Street banks will have to cough up more details on the private stock markets they run, which roughly account for an estimated one-seventh of all U.S. equities trading.

Securities and Exchange Commission members unanimously approved rules Wednesday that force trading venues known as dark pools to disclose more data and reveal potential conflicts of interest. The SEC proposed the regulations -- some of which resemble requirements for public stock exchanges -- in 2015 after firms including UBS Group AG paid tens of millions of dollars to settle allegations that they allowed practices that benefited high-frequency traders without properly informing other clients.

Wall Street Dark Pools to Come Out of Shadows Thanks to SEC

In the past decade, discussion around dark pools evolved from an obscure market-structure issue to a highly-charged debate over whether traders armed with computer algorithms were using the private venues to take advantage of investors with slower price feeds. The fight gained traction in 2014 after the release of Michael Lewis’s book "Flash Boys.”

Dark pools execute about 14 percent of U.S. equity volume, according to Rosenblatt Securities, an institutional brokerage firm specializing in market structure. Mutual funds and other institutional investors have often used the venues to make big trades because the firms can do so without tipping off the rest of the market.

The SEC’s plan requires brokerages that operate dark pools to issue public filings that highlight conflicts, spell out how the venues might prioritize certain clients’ trades and disclose trading charges. Among the topics that will get more transparency is what’s known as co-location, a controversial practice in which high-speed traders place computer servers within dark pool data centers to get information on stock orders before other market participants.

Democratic SEC Commissioner Kara Stein said the rule is a good start but added that regulators need to address the “opacity” of trading in Treasuries and other fixed-income securities on dark pools, not just stocks. SEC Chairman Jay Clayton said he shared Stein’s concerns.

SEC officials said Wednesday that the rule took into account more than two dozen comment letters the regulator received from the finance industry and other interested parties since its 2015 proposal. Morgan Stanley, which runs one of the biggest dark pools, wrote in 2016 that the initial plan failed to take into account difference between various private venues. Morgan Stanley also said some of the disclosures wouldn’t be helpful to clients.

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