| NEW YORK/WASHINGTON, April 9
NEW YORK/WASHINGTON, April 9 The chief
executives of three of the top U.S. exchanges met with
regulators in Washington DC on Tuesday to express concerns about
the negative effects associated with the increase in trading
taking place away from public exchanges.
Representatives at the exchanges confirmed NYSE Euronext's
Duncan Niederauer, Nasdaq OMX Group Inc's
Robert Greifeld and BATS Global Markets' Joseph Ratterman met
with officials from the U.S. Securities and Exchange Commission,
but would not comment further.
The meetings highlight a growing sense of urgency at the
exchanges about the increasing amount of trading by-passing
their venues and going instead to so-called "dark pools" and
"internalizers," said a person at one of the exchanges, who did
not have permission to speak to the media.
"Dark pools" are trading platforms where buyers and sellers
of stocks remain anonymous and their orders are hidden until
they are executed. "Internalizers" are brokers that match orders
within their own firms, allowing them to avoid exchange fees.
The exchanges have long argued that the rise of off-exchange
trading distorts prices in the public markets and makes the
markets in general less transparent.
The practice also affects their bottom lines.
"The numbers are pushing them to want to refocus regulatory
attention," said SEC Commissioner Dan Gallagher. "If you look at
the market share of the exchanges, the numbers are at all time
Gallagher said the exchange CEOs were talking with
individual commissioners in a series of meetings and he planned
to meet with Greifeld and Ratterman.
Off-exchange venues, not including electronic communication
networks, made up 38 percent of U.S. trading volume in February,
according to data from research firm Tabb Group.
Dark pools do appear to reduce liquidity and increase
trading costs on the public markets, said Craig Pirrong, a
finance professor at the University of Houston.
But the competition dark pools provide to exchanges has the
effect of keeping trading costs in check and costs could be
higher without that.
"It not a matter of black and white - or of dark and light,
if you will," he added.
There are around 50 dark pools in the United States and 13
public exchanges. Some of the largest U.S. dark pools are run by
banks that are also some of the exchanges' largest customers.
They include Credit Suisse Group AG's CrossFinder,
Morgan Stanley's MS Pool and Citigroup Inc's Citi
Credit Suisse and Morgan Stanley declined to comment, while
a Citi spokesman was not immediately available.
Incoming SEC Chairman Mary Jo White said in her Senate
confirmation hearing on March 12 that the agency should continue
to explore the effects of dark pools, along with other issues,
such as high-frequency trading and the proliferation of order
types on exchanges.
White, a lawyer and former federal prosecutor, was a
director on Nasdaq's board from May 2002 until Feb. 2006.
Regulators in Australia proposed new rules last month that
would create a minimum threshold for orders in dark pools and
improve disclosure and supervision of off-exchange trading.
And in Canada, new rules took effect last October setting
minimum sizes for dark orders that do not give a significantly
better price than public exchanges. The market share of dark
pools in Canada hit a record of 5.8 percent in August last year,
but dropped to 2.1 percent a month after the new rules were
introduced and stood at around 2 percent in February, according
to data from Rosenblatt Securities.
"What they are trying to do is to get dark pools to go back
to the reason they were formed in the first place," said Seth
Merrin, CEO of dark pool operator Liquidnet, which has
operations in the United States, Canada, Europe and Asia.
Dark pools were originally meant for institutional investors
looking to buy or sell large blocks of shares without tipping
their hand to the wider market, which could trade against their
positions. But the average size of orders now being traded in
dark pools in February was just over 200 shares, in line with
public exchanges, according to Rosenblatt.
The result of smaller transactions spread across 50 venues
is that retail investors end up with shallower public markets,
making it harder for them to get trades executed, said Merrin.
He would like to see the SEC follow Canada and Australia's
lead on dark pool regulation.
"We are at this point, lagging the other regulators around
the world in doing something about this," he said.
Liquidnet's average execution size is 44,000 shares.