19 November 2017

SEC Set to Spur Exchange Trading

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WASHINGTON—Top U.S. securities regulators are embracing a plan designed to shift more stock trading onto exchanges and away from private trading venues operated by banks and other firms, according to people familiar with the discussions.

The move, which could deliver a blow to bank trading operations, is expected to be part of a coming Securities and Exchange Commission pilot program aimed at boosting trading in the stocks of smaller companies.

The plan's inclusion in the pilot would mark a small victory in a larger battle over stock trading between exchanges and operators of so-called dark pools. It would affect a small amount of trading, but a successful test could be a precursor to applying it on a broader scale in the future, the people familiar with the discussions said.

The broader pilot program would widen "tick" sizes—or the increments between price quotes—for smaller companies as part of an effort to boost trading in such securities. Supporters argue that trading in five-cent or 10-cent increments instead of penny increments would make it easier and more profitable to trade shares of smaller companies and reduce volatility.

The broader pilot program would widen "tick" sizes—or the increments between price quotes—for smaller companies as part of an effort to boost trading in such securities. Supporters argue that trading in five-cent or 10-cent increments instead of penny increments would make it easier and more profitable to trade shares of smaller companies and reduce volatility.

Regulators are considering adding another provision to the rule that would force privately run trading venues, including dark pools, to give investors a better deal than they enjoy under existing regulations. The so-called "trade at" rule would mandate that trades for certain stocks in the pilot take place on exchanges unless the private venues offered significant price improvements. Many big players in the brokerage industry and exchange operator BATS Global Markets Inc. have said they oppose the idea.

"We have been clear since day one that we'd like to see a tick-size pilot and we think it should... not introduce other variables such as trade-at," said Jim Toes, head of the Security Traders Association, an industry group.

Regulators are increasingly scrutinizing dark pools as they lure more trading away from exchanges that publish significantly more information about traders' buy and sell orders. For instance, the Financial Industry Regulatory Authority, Wall Street's self-regulator, has opened an inquiry into the way brokers route customer orders and how they use their own dark pools in executing trades, The Wall Street Journal reported last month.

Private venues such as dark pools don't publish buy and sell orders, only reporting the results of completed trades. In March, 37% of all trading occurred away from stock exchanges, up from 33% two years ago, according to Tabb Group.

Click here for the full article in the Wall Street Journal.

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