IOSCO Proposes Regulatory Principles For 'Dark Pools'

by Robin Pilgrim, LawAndTax-News.com, London

28 October 2010

The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published a consultation report, containing principles to assist securities markets authorities in dealing with issues concerning dark pools of liquidity.

Dark pools enable institutional traders to buy and sell large batches of stock without revealing data to the public. Taking place off-exchange and classed as over-the-counter transactions, dark trading has come in for criticism from national regulators and governments because it makes the market place less transparent.

The report’s principles are designed to minimise the adverse impact of the increased use of dark pools and dark orders in transparent markets on the price discovery process; and help to ensure that regulators have access to adequate information to monitor the use of dark pools and dark orders.

They would also help to ensure that investors have sufficient information so that they are able to understand the manner in which orders will be handled and executed; and increase the monitoring of dark orders and dark pools in order to facilitate an appropriate regulatory response.

Hans Hoogervorst, Chairman of the Netherlands Financial Markets Authority and of IOSCO’s Technical Committee, said:

“Global equity market structure has undergone significant changes in recent years. These include exchanges and non-exchange trading venues, such as alternative trading systems, and multilateral trading facilities, which have developed new and innovative trading functionality to attract and maintain their order flow.”

“One such innovation is the expanded use of dark liquidity and the development of so-called dark pools and dark orders. However while these innovations may meet a demand in the market, they also raise regulatory issues that merit examination.”

“The principles we are publishing today are aimed at addressing regulatory concerns that dark liquidity poses for markets and regulators in the areas of price discovery, market fragmentation and potential risks to market integrity. The principles will provide regulators with the tools to develop and maintain an appropriate oversight regime aimed at addressing any potential risks posed by dark liquidity in their respective jurisdictions.”

The Technical Committee, in developing these principles, focused on a number of areas which had been identified as possibly having adverse effects on the market. These included transparency and price discovery, market fragmentation, knowledge of trading intentions, fair access; and the ability to assess actual trading volume in dark pools.

The consultation period for responses closes on January 28, 2011.

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