What Happens When A Regulator is Reactive and not Proactive?



August 2015 – ITG fined $20.3 million for operating a secret trading desk and misusing the confidential trading information of dark pool subscribers.

ITG abused the trust of its customers and engaged in conduct justifying the significant sanctions imposed in this case.” – Andrew J. Ceresney, Director of the SEC’s Division of Enforcement


January 2015 – UBS fined $14.4 million for a series of dark pool violations from 2008 to 2012.

The UBS dark pool was not a level playing field for all customers and did not operate as advertised.” – Andrew J. Ceresney, director of the SEC’s Division of Enforcement


June 2014 – Barclays is subject of NY Attorney General lawsuit for misrepresentations in their dark pool.

“Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit.  Barclays’ dark pool was full of predators – there at Barclays’ invitation.” – Eric Schneiderman, NY Attorney General


Pending – Media reports that Credit Suisse is in talks to pay a fine in the high tens of millions over allegations of wrongdoing in their dark pool.


Above is a list of dark pool violations that have occurred just over the last year.  As you can see, the violations are occurring more frequently and the fines are getting larger.  We expect to see even more of these fines and violations in the near future yet still nothing is being done on the regulatory side to reign in the bad behavior at these venues.  To be clear, we don’t have a problem with alternative trading systems that attempt to help investors lower their transaction costs by matching buyers and sellers.  We do have a problem, however, with the lack of transparency and disclosure with certain ATS’s.  We do have a problem with the fragmentation that has occurred in the equity market and in particular with the unnecessary intermediation that occurs at many dark pools.


While we think the SEC has done a very good job of uncovering these dark pool violations, we wonder how many more violations will have to occur before the SEC decides that it’s time to reign in these rogue venues.   After trying and failing in 2009 to bring some order to the dark pool universe, the SEC has remained mostly silent on new reform ideas.  This could be because many industry participants, including members of the SEC’s Market Structure Advisory Committee, have a vested interest in the current model.  These status quo industry types have long warned the SEC not to change the US equity market model and have argued for a much more tedious “holistic” approach to market structure reform.  They often hide behind the mantra of “free markets” and “competition” but they are really just trying to protect their own business models.  They often cite the “First Do No Harm” doctrine and warn that any change to their competitive model will harm liquidity.


The real harm now is the lack of action by U.S. regulators.  Every time a new violation and fine hits the newswires, a little more trust and confidence is drained from the market.  We think the time for our regulators to act is long overdue and we cite the success that other countries have had when tackling the same issue.  In particular, Canadian and Australian regulators have both recently made improvements to their dark markets and these improvements have been proven to not harm liquidity.




In October 2012, Canadian regulators enacted new dark pool rules after a market review which started three years earlier.  The new rules set minimum price and size increments for off exchange trading as well as a trade-at requirements.  In his testimony before a Senate Subcommittee in December 2012, then ITG CEO Bob Gasser commented on these new rules:


“Most recently, Australia and Canada have imposed regulations around internalization that will provide us with data sets to examine when considering the implications of potentially taking similar action here in the U.S.  Early returns do not look promising in terms of the effects on liquidity and trading costs. Regressing to an oligopoly of U.S. exchanges is clearly not the answer.”


Well, since then the Canadian regulators have had three years to analyze the results of the new rules and it looks like Mr. Gasser’s early prediction has been proven inaccurate.  In May of this year, IIROC published a Study of the Impact of the Dark Rule Amendments and concluded:


“IIROC understood that the implementation of these rules might impact certain investors and business models differently. The results of our study bear this out; individual dark trading venues were impacted differently based on their service models, and individual brokers were impacted differently depending on their business models.


While active retail flow and passive HFT experienced increases and decreases respectively in trading costs, retail flow as a whole (active and passive) and, in fact, the trading community as a whole, were not impacted.


Lit market depth and average trade value increased, although price efficiency declined. Dark liquidity provision became more diversified, and buyside dark trading increased over the longer term.”




In May 2013, after two years of study, the Australian Securities & Investment Commission (ASIC) approved a meaningful price improvement rule and changes to block tier thresholds.  ASIC created these new rules because of concerns they had about the impact of dark liquidity on the efficiency and integrity of their markets. One year later, after studying the data, ASIC issued a status report  on the rule changes and concluded:


The market has not been adversely affected by the changes to dark liquidity rules. While spreads are unchanged, we are seeing other benefits from the meaningful price improvement rule and lower block tier thresholds, including the discontinuation of trends that were concerning ASIC.”



For those that claim liquidity will be harmed by market structure reforms, we say look at the data from Canada and Australia.  There are no more excuses and it’s time that we finally get serious about cleaning up our market.