Dark pools might become a regulatory priority soon
Finra has made clear that it intends to take a close look at dark pools this year. As noted by Bloomberg, the key SRO is already taking a look one big issue: Disclosure.
FINRA is conducting a series of examinations of firms that operate an ATS and their affiliates. In particular, as FINRA notes, it "is seeking to determine through its examination program whether firms are consistently and accurately representing and disclosing various aspects of their ATS operations to their subscribers."
Some of the big issues include the following: how dark pools "route, represent, interact or otherwise handle" order flow; disclosure around order types; compensation, errors, and IOIs. That Finra has already launched a review of these issues is not at all surprising.
I wonder if there is a more formal review underway at the SEC, which many think will be forced to grapple with this issue sooner rather than later. My sense is that the SEC is under-going a transition at the top right now. The in-coming chairman stems from the prosecutor/defense realm, not the market structure realm.
So it remains to be seen how big of a priority market structure will be. That said, the SEC charged two firms last year with dark pool abuses, eBX and Pipeline Trading. Dark pools specifically may be on the radar.
In the end, it may be that Finra ends up imposing minor changes on dark pools, which will generally preserve the status quo, making wide-scale "reform" unnecessary. Of course, any tweaks will have to be interpreted in light of the larger market structure context.
- here's the Bloomberg article