Dark Pool Plumbing /Tomorrow Last Day to COmment to FINRA 5210/ Ammendments to Dark Pool IOI Rules!
FINRA has issued a request for comment on IOI rulemaking, specifically amendments to their Rule 5210. You can read about it here: Indications of Interest.We would like to summarize the amendments here, and strongly urge you to comment. The ways that IOI’s have morphed are drastically different than what many of us used to understand as IOI’s.
What are IOI’s?
Indications of interest, or IOIs, are non-firm expressions of trading interest that contain one or more of the following elements: security name, side, size, capacity and/or price. e. Firms have the ability to communicate or advertise proprietary or customer trading interest in the form of IOIs to the marketplace through their own systems or several service providers that disseminate the information to subscribers and/or the marketplace.
In recent years, or months, the buyside has rightfully become concerned with how information about their orders is shared with the street. We are not just talking Exchange Data Feeds here. Many of you (and us) have taken steps to limit how algorithms and destinations react to IOI’s on the street. The issue is, when you send an order into BrokerA’s algorithm, does it send out IOI’s on your order to various dark pools, or prop HFT market making firms, or ELP’s, or SLP’s, or RLP’s? The answer you often receive is “we do not send outbound IOI’s although we react with inbound IOI’s, so you are safe. We only react when the other side has IOI’d (or SOI’d –solicitation of interest) us first.” Some of you even insist that your order only react with natural IOI’s.
In May 2009, FINRA published Regulatory Notice 09-28 which reminded sell-side firms that if they indicate that an IOI is natural, then it had better be a real customer order on the other side.
FINRA remains concerned that firms are sending out misleading IOI’s. The types, and sheer explosion in the number of IOI’s, have changed however. The very 1990’s way of a sales trader IOI’ing interest on AUTEX or BLOOMBERG is not really what we are talking about here. Rather, today, in Smart Order Routers, as well as just plain old dark pools, a tremendous amount of IOI’ing goes on.
The stated goal of all this IOI’ing is to get you all price improvement and liquidity in the dark. So, for example you may have an order BrokerA’s algo that stops by DarkPoolA because DarkPoolA first sent BrokerA an IOI mentioning that they have non-firm trading interest in your name. Your order gets a partial fill in that dark pool that is better than the NBBO. Hopefully.
Circling back to FINRA, they want to insure, as they should, that when your algo gets IOI’d, there really is something there. They specifically also differentiate between standard IOI’s, and “natural IOI’s”. Imagine how jaded you would feel if you called up BrokerA, told them that responding only to inbound IOI’s was not good enough, and that they are only to respond to inbound natural IOI’s only, or none at all, and they agreed, only to still flash your order to a who’s who list of high freaks.
SO What Is FINRA asking?
1) Should FINRA define the term indication of interest?
2) Should FINRA define the term natural as it applies to IOI’s?
3) Is the requirement that a firm has received a customer order before labeling an IOI or quotation in a manner that indicates the interest originated with a customer too limiting?
4) Is it valid for you to not want to interact with IOI’s that are not natural?
Can you add anything else in your comment about IOI’s?
Should you ask them to define dark pool “conditional orders” for example? Those are the orders that magically represent your orders in nineteen places at once. Or perhaps define SOI’s? We think they wouldn’t mind.
How do I comment?
You email your comments to email@example.com
What Happens If I don’t Comment?
We fear that if you don’t, as owners of the market, make your wishes explicitly known, and in mass, then FINRA will receive comments from all the SLP’s, ELP’s, RLP’s and dark pools who will comment that these are not material definitions, and that regulation or clarification is unnecessary, and that things are fine as they are, and that clarification can hurt your liquidity (or their volumes and prop trading).