Dark Pool Blocks on the Rise?

New dark pool regulations under consideration by the US Securities and Exchange Commission (SEC) could increase competition among dark venue providers.

Proposed rules would exempt venue operators executing block-sized trades of $200,000 or greater from real-time identity disclosure requirements. If that exemption remains in place and the real-time reporting rule goes into effect, more dark pool providers may boost their block-trading activities to work around the SEC requirement.

Venues including Liquidnet, ITG's Posit, and Pipeline would stand to benefit from the rule's block exemption given their block-oriented models, according to Tabb Group analyst Cheyenne Morgan, but venues such as Credit Suisse's CrossFinder and Goldman Sachs' SigmaX, which are less oriented toward block trading, may pursue higher average daily volumes in order to avoid the reporting rule.

"Already, you can see that a lot of these dark pools that aren't traditional block trading facilities have had larger average daily volumes over the past year," says Morgan. "A lot of these providers have already started gearing up for that trend, and have come out with block-style features to accommodate clients."

But some dark pool providers, including those focused on block trading, question the effects of the SEC's size exemption on smaller, more illiquid trades for which clients often turn to alternative execution venues.

"The $200,000 threshold was a good start," says ITG global head of product management Mark Wright. "But that said, it is still a bit clumsy, especially for some of the names that benefit the most from dark pools, and those are smaller or less liquid names."

Howard Meyerson, general counsel at Liquidnet, also sees the SEC's exemption as appropriate for large-cap names, but not for small-cap instruments.

"We looked at some of our internal data and found that this $200,000 figure would work fine for large-cap names. But for mid- and small-caps, that figure is way too high,” says Meyerson.

Meyerson says Liquidnet and other industry participants have held discussions with the SEC aimed at identifying more appropriate thresholds for less liquid stocks.