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Market Surveillance 2.0: Beyond the Crisis

03 June 2014

Dark Pool Transparency Just Beginning

New FINRA reporting requirements for Alternative Trading System volumes may be just the beginning of the regulatory push for more transparency into off-exchange trading.

The Financial Industry Regulatory Authority (FINRA) released the first week of Alternative Trading System (ATS) volume data this week. This is the first time industry participants have been able to see a comprehensive list of ATS volumes at this level of detail and transparency.

The data from the week of May 12 includes ATS share and trade volumes on a stock level. The FINRA website provides two different aggregated views of the information under “ATS Data” and “Issue Data” tabs. The first important thing to note about this data is that it only includes “Tier 1” stocks, or S&P 500, Russell 1000 and selected exchange-traded products. The second round of data, which includes “Tier 2” stocks (all other NMS stocks) and OTC equities will be released in two weeks.

Based on TABB Group’s monthly self-reported ATS volumes (see TABB’s April Equities LiquidityMatrix), we estimate that Tier 1 stocks generally represent approximately 50% to 60% of ATS volume, with exceptions for some ATSs. ATSs that trade more illiquid stocks will likely see a larger percentage of volume in Tier 2 NMS stocks than in Tier 1 instruments.

This data alone is more than enough to spur conversation and interest in market structure, especially with regard to dark pools, which is surely an intended consequence from FINRA. However, there is a possibility that there could be even more light shone in the direction of off-exchange trading.

A few firms reacted positively in their response letters to FINRA’s request for comments on expanding the scope of the new reporting rule to include requiring information from non-ATS over-the-counter broker-dealers. This could include anything from “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,” according to the FINRA proposal. Although the rule specifically states that it “does not currently contemplate applying the proposed rule change beyond ATSs” [emphasis added], the fact that FINRA is requesting comments about expansion shows a general interest in further transparency for off-exchange trading. For April 2014, off-exchange trading comprised 35.8% of industry volume.

TABB Group is certainly interested to see how this data evolves and in receiving greater clarity in the space. However, on May 29, the Securities and Exchange Commission approved a fee for access to the data for all professional and vendor users. Non-professional users will continue to be able to access the information for free.

[Related: “Regulators Must Co-Evolve With Technology and the Industry”]

Spotlight-white-trans For more stories in the Market Surveillance 2.0: Beyond the Crisis Spotlight Series click here.

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