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SEC Proposes Rules and Amendments Regarding Regulation of Non-Public Trading Interest (“Dark Pools”)

Advisory | November 19, 2009

The Securities and Exchange Commission is proposing to amend certain regulatory requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) that apply to what are often referred to as “dark pools.” Comments are due within 90 days after the publication of the proposal in the Federal Register.

The proposal has three main components. First, the proposed amendments would expressly require that non-block sized actionable indications of interest privately transmitted by dark pools and other trading venues to certain selected market participants be treated as either “bids” or “offers.” Second, the proposed amendments would substantially lower the Regulation ATS thresholds that, once met, require an alternative trading system (ATS) to publicly display its orders. Third, the proposed amendments would change the joint-industry plans for publicly disseminating consolidated trade data to require the dissemination of the identity of the dark pool or other ATS associated with executed transactions on a real-time basis.

Actionable IOIs

The proposal amends the definition of “bid” or “offer” in Rule 600(b)(8) of Regulation NMS under the Exchange Act. The definitions of “bid” and “offer” are important terms under Rule 602 of the Exchange Act because Rule 602 requires exchanges and OTC market makers to make available their best-priced bids and offers in NMS stocks to the consolidated quote data. Similarly, Rule 301(b)(3) of Regulation ATS governs the order display obligations of ATSs and requires ATSs to make available for inclusion in the quotation data its best-priced orders (i.e., bids and offers) in NMS stocks if the ATS exceeds the 5% trading volume threshold. Currently, an ATS is not required to include its best-priced orders for an NMS stock in the consolidated quotes data (even if it widely disseminates such orders) when its trading volume in that NMS stock is less than 5%.

Importantly, the current definition of “bid” and “offer” in Rule 600(b)(8) specifically excludes “indications of interest” (IOIs). Under the new proposal, a “bid” or “offer” would include “actionable” IOIs. An IOI would be considered “actionable” if it explicitly or implicitly conveys all of the following information about available trading interest by the IOI sender: 1) symbol; 2) side (buy or sell); 3) a price that is equal to or better than the national best bid for buy orders and the national best offer for sell orders (NBBO); and 4) a size that is at least equal to one round lot.

Under the proposal, an actionable IOI that meets the criteria above would subject the sender to the quoting requirements that generally apply to that type of venue, whether it be an ATS, OTC market maker or an exchange. To protect the value associated with information regarding large block orders, the SEC is proposing an exclusion from the “bid” or “offer” definition for actionable IOIs that are for a quantity of a NMS stock whose market value is at least $200,000.

ATS Display Obligations

The SEC is proposing to amend Rule 301(b)(3)(i)(B) of Regulation ATS to reduce the average daily trading volume percentage that would trigger the order display and execution access requirements for ATSs. Under the current rule, an ATS that displays orders to any “person” and has an average daily trading volume of 5% or more of the aggregate average daily share volume for an NMS stock during at least four of the preceding six calendar months, must make available its best priced orders for that NMS stock to the consolidated quotation data. The proposal would reduce the volume percentage under these conditions from 5% to .25%. Further, the SEC proposes to amend Rule 301(b)(3)(ii) to clarify that a “person” under the rules does not include ATS employees, but does include subscribers and non-subscribers of the ATS. To avoid the reporting of best priced orders in its system, an ATS could cease sending actionable IOIs to any person.

Consistent with the SEC’s proposal on actionable IOIs, the SEC proposes excluding from the definition of “bid” or “offer” under Rule 301(b)(3)(ii) orders having a market value of at least $200,000 that are displayed to those who are reasonably believed to represent current contra-side interest of at least $200,000.

Post-Trade Transparency for ATSs

The SEC proposed amendments to the Consolidated Tape Association Plan and the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Treading Privileges Basis (the “Nasdaq UTP Plan”). The proposals would require transactions on ATSs to carry a specific identifier that would be disseminated publicly, consistent with the identifiers for exchanges. Under the proposal, and similar to the exclusions for large trades discussed above, transactions with a market value of at least $200,000 would not be reported with the ATS identifier.


In addition to the general comments the SEC seeks on the proposed amendments, the SEC also asks specific questions related to each amendment. The proposals as drafted would most affect dark pools that send actionable IOIs to other persons.

Click here to read the Proposing Release regarding the Dark Pool Amendments.