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."

Since 2009 Canadian regulators sought industry feedback on how to regulate dark pools, which have divided the industry.

Some argued tough rules would crimp the growth of dark liquidity in the country and undermine Canada's ability to compete globally.

Others worry the growth of dark pools and their anonymous nature means that stock pricing may not be transparent.

Australia and Europe are considering similar restrictions to the ones just imposed in Canada, and the U.S. Securities and Exchange Commission is also mulling such rules, said Schack.

There are several dark pools operating in Canada: Match Now, operated by TriAct Canada Marketplace, and Liquidnet Canada, which caters to large institutional investors.

Alpha Group, TMX Group's biggest competitor, runs a platform known as IntraSpread, and Instinet and Goldman Sachs Group Inc also operate venues. As well, there are dark orders on some exchanges.

Combined, dark liquidity makes up roughly 5 percent of total of equity trading market share in Canada, said Rosenblatt.

($1 = C$0.9975 Canadian)

(Editing by Jeffrey Hodgson)