Alert November 17, 2009

SEC Issues Release for Dark Pools Proposal

The SEC issued the formal release describing its proposal to amend the regulatory requirements that apply to non-public trading interest in National Market System (“NMS”) stocks, including so‑called “dark pools” of liquidity, which the SEC defines as “alternative trading systems (“ATSs”) that do not publicly display quotations in the consolidated quotation data for NMS stocks that is widely disseminated to the public.  The proposal has three principal elements: (1) it would amend the definition of “bid” and “offer” in the quotation requirements under the Securities Exchange Act of 1934 (the “1934 Act”) to expressly include actionable indications of interest (“IOIs”) privately transmitted by dark pools and other trading venues to selected market participants; (2) it would lower the trading volume threshold in ATS that triggers the obligation to display best‑priced orders in the consolidated quote stream from 5% to 0.25% to give public access to quote data regarding the best prices and sizes (including actionable IOIs) for NMS stocks that trade in ATSs; and (3) it would amend the joint self regulatory organization (“SRO”) plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of ATSs on the reports of their executed trades to FINRA/SROs in an effort to improve post-trade transparency.  In discussing the first and second elements of the proposal, the proposing release states that “[t]he practical result of the proposed amendment to the definition of bid or offer and the proposed lowering of the ATS volume threshold would be that ATSs could not privately display actionable IOIs only to select market participants and thereby create two-tiered access to information on the best available prices for NMS stocks.”  Notably, the SEC has not proposed to amend the “fair access” requirements of Regulation ATS.  Comments are due 90 days after the release’s publication in the Federal Register.