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“Looking Into…”

12

December, 2012

Our elected officials and regulators are extremely capable… at looking into issues. Whether those issues are steroids in baseball, dark pool regulation, market kill switches for runaway algos, The Goldman Sachs, or even the banning of flash order types, we can rest easy knowing that folks who are supposed to be working for the American Public will look into these issues.

On December 18th, the Senate Banking Committee, headed by Senator Jack Reed, will hold a panel to discuss Dark Pools. This panel will include NYSE’s Lawrence Liebowitz, CSFB’s Dan Matthison, ITG’s Bob Gasser, and NASDAQ’s Eric Knoll. You have all seen these faces and panelists before. The Senate, Congress, and the SEC sure have.

On the bright side, we are pleased that Senators Reed and Levin have taken a leadership role to safeguard our markets, and fill the void left by Senator Ted Kaufman’s retirement. We sincerely hope they really get into the plumbing. Dark Pools need much more transparency and disclosure! We would like to see:

-          Disclosure of the exact order matching and pricing rules in each dark pool.

-          Disclosure each month of each pool’s largest “liquidity providers”

-          Disclosure each month of each pool’s average trade size.

-          Disclosure each month of each pool’s financial compensation arrangements between them and their customers (i.e. payment for order flow, or free trading arrangements).

We are thrilled that the US is always so quick to look into problematic issues in our markets. We would be even happier if there was a tendency to act subsequently. Other countries seem to do a better job in that regard. For example Canada has already implemented restrictions on dark pool trades. Australia has just done so as well. Even India’s regulatory arm has sown a propensity to act to protect investors in their markets – just yesterday the FMC suspended algo trading in their micro and mini futures contracts!

We eagerly await the day where our government learns the action verbs act, implement, and institute, as opposed to probe and “look into”.

 

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