Canada regulators impose tough rules on "dark" trades

Fri Apr 13, 2012 4:47pm EDT
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By Jennifer Kwan

TORONTO (Reuters) - Canada's securities watchdogs unveiled strict rules on Friday for anonymous stock trades in so-called "dark pools," a move the regulators said was aimed at protecting investors from the risk of unfair pricing.

Dark pools allow some players, often big institutions, to match orders while concealing price and volume. By enabling them to hide their cards, the dark pools limit the impact of an order on the stock's price before the trade's completion.

Many big institutional investors fear that if orders for their large trades are revealed on the open market, it would drive stock prices higher or lower, costing them money.

The new rules allow exemptions for trades that have a value of more than C$100,000 ($100,300). But for smaller trades, the new framework only allows dark trades in cases where one of the party finds a meaningfully better price than "light" trades available on the open market.

The rules - set by the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada - will require light orders take priority over dark orders at the same marketplace, at the same price.

Taking effect October 10, the rules also enable regulators to set minimum sizes for dark orders if needed.

"It's a bold move. It's an investor friendly move," said Justin Schack, head of market structure analysis at institutional agency brokerage Rosenblatt Securities in New York.

"They are trying to prevent a very large portion of the market from being cut off from the price discovery process."   Continued...