Dark pool operators fight trade-at proposal

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At times recently, it has seemed like open season on dark pools, as the debate over these liquidity pools has led to lots of controversy and debate. The latest issue concerns the so-called trade-at proposal. Some dark pool operators, especially internalized dark pool operators, see this as a direct strike against their business, notes Traders.

A trade-at rule would essentially bar firms from trading at a price that merely matched the NBBO. Instead, they would be required to provide price improvement or route the order away, perhaps to one of the exchanges, which stand to benefit from such a rule.

The biggest fear is that by not allowing internal matches among customers and forcing the order out, the chances of opportunistic hedge funds (of the high-frequency sort) interfering rises.

The SEC is not likely to move on the trade-at rule anytime soon. Internalization, for better or worse, is an ingrained practice that has built up over years. Grappling with it will be difficult. This is really part and parcel of the larger market structure issues that are vexing to say the least. Most doubt that the resource-pressed SEC will make a definitive move toward large-scale market structure reform this year, if ever.

But the internalization issue is on the table. The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, which was tasked with looking closely at the May 6 Flash Crash, suggested the agencies take a close look at a trade-at rule and other ways to deepen the protection for orders below the top bid and offer.

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