NYSE chief urges changes for ‘dark pools’

WASHINGTON — With federal regulators poised to propose changes for so-called “dark pools,” the head of the New York Stock Exchange said tighter rules should be applied to the alternative trading systems that don’t publicly provide price quotes and compete with traditional exchanges.

The Securities and Exchange Commission is expected to propose new rules on Wednesday that would require fuller display of information on trades, bids and offers for the “dark pool” systems.

NYSE CEO Duncan Niederauer and Sen. Charles Schumer, D-N.Y., have asked the SEC to subject the alternative systems to a stricter set of regulations that’s closer to the regime for the major exchanges. Their proposed changes would go further than those being considered by the SEC.

“We are not against dark pools,” Niederauer said Tuesday in a conference call with reporters. “We’re in favor of competition; we’d just like it to be a level playing field.”

The SEC initiative is the latest action by the agency seeking to bring tighter oversight to the markets amid questions about transparency and fairness on Wall Street. The SEC has floated a proposal restricting short-selling — or betting against a stock — in down markets.

Last month, the agency proposed banning “flash orders,” which give traders a split-second edge in buying or selling stocks. A flash order refers to certain members of exchanges — often large institutions — buying and selling information about ongoing stock trades milliseconds before that information is made public.

The alternative trading systems have grown explosively, accounting for an estimated 7.2 percent of all share volume. SEC Chairman Mary Schapiro has identified them as a potential emerging risk to markets and investors, and asked agency staff earlier this year to examine ways of bringing greater transparency to them.

The systems are private networks matching buyers and sellers of large blocks of stocks. Institutional investors like pension funds may use them to sell big blocks of stock away from the public scrutiny of an exchange like the NYSE or Nasdaq Stock Market that could drive the share price lower.

“This lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially,” Schapiro said in a speech in June. “For example, the lack of reliable information can prompt speculation and suspicion about the basis for market fluctuations.”

Schumer sent a letter to Schapiro asking the SEC commissioners to consider stricter regulations for the trading systems as well as establishment of a consolidated surveillance system for all markets, for which the alternative systems would contribute some of the cost.

SEC approval would be required to set up a new alternative system or make changes in operations of an existing one.

“I respectfully ask that you consider the proposals … to ensure that (alternative trading systems), while continuing to provide beneficial competition to registered exchanges that directly and indirectly benefits retail investors, do not undermine the fairness, transparency and integrity in our markets,” Schumer wrote.

A 1999 SEC rule established a separate set of regulations for alternative trading systems, which have grown to around 30 from 10 in 2002. Examples include: London-based Turquoise Trading Ltd., a European system established by Citigroup Inc., Goldman Sachs Group Inc., France’s Societe Generale SA and other major banks; Toronto-based Alpha was set up by several major Canadian banks; and Liquidnet Inc. in New York.