Dark Pools Face New Finra Disclosure Requirements

U.S. securities regulators issued a proposal requiring private venues including dark pools to release more data, including weekly volume reports and disclosures on how much trading of each stock they handle.

The rules, if approved by the U.S. Securities and Exchange Commission, would shed light on operators that have historically faced no obligation to publicly report their market share, so information has either been self-reported or estimated by analysts. The shift applies to dark pools and venues known as alternative trading systems, not the transactions broker-dealers handle within their walls via a process called internalization.

The Financial Industry Regulatory Authority, the private-sector overseer of U.S. brokerages, announced the proposed rules in a filing dated yesterday. If approved, Finra would start releasing data to the public on a two- or four-week delay depending on the stock. The decision comes as the SEC prepares to publicly release its reports on U.S. trading amid criticism regulators haven't kept up with changes in modern markets.

"The proposed rule change will enhance Finra's regulatory and automated surveillance efforts by enabling it to obtain more granular information regarding activity conducted on or through" alternative trading systems, Finra said in the filing.

Finra's board authorized requiring more disclosure in July. Bloomberg News parent Bloomberg LP runs an alternative trading system called Bloomberg Tradebook.

Trading Disclosure

As U.S. exchanges lose business to private venues, owners of public markets have sought help reversing the shift. NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) have asked the SEC to consider rules keeping orders off dark pools unless those venues offer a better price than exchanges at a given moment.

Under existing rules, Finra can't be sure which private venue handled a given trade. The new system would introduce unique identifier codes for each market.

Finra said it may consider expanding disclosure. Almost 40 percent of stock trading in the U.S. happens off exchanges, according to data compiled by Bloomberg.

Broader coverage "could include broker-dealer internalized executions, trades executed in the over-the-counter market by wholesale market makers trading with order entry brokers, and executions on broker crossing systems that have not filed a Form ATS with the Commission," Finra said in the filing.

The proposed rules would take effect 90 days after publication of a notice announcing SEC approval.

Finra's decision comes with the SEC poised to issue research from its new system for monitoring markets, including a look at practices that some blame for giving high-speed traders an unfair edge.

The reports will use data from the SEC's Midas market-surveillance system, according to two people briefed on the plans. The findings could help inform whether new regulations are needed to address strategies such as canceling a high percentage of orders, said the people, who asked not to be identified because the plan isn't ready to be announced.