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NYSE to Shine Flashlight on Dark Pools

Goldman Sachs, Getco, Barclays Capital, Knight, and UBS have all agreed to "print" dark pool trades to NYSE Euronext's Trade Reporting Facility.

Are dark pools becoming less dark? Starting next month, NYSE Euronext will allow broker/dealers to report dark pool (alternative trading system) trades to a central Trade Reporting Facility that will post the venues' daily trading activity at NYSE.com.

Goldman Sachs Execution & Clearing, Barclays Capital, Getco, Knight Equity Markets, and UBS Investment Bank have volunteered to begin reporting their respective venues' activity to the facility in November. Other firms have indicated an interest in NYSE Euronext's transparency initiative and are establishing the necessary technology to begin participating in the program in the coming weeks, according to the exchange.

This initiative appears to be a response to regulators' concerns about dark pools.

In an October 8 speech, James A. Brigagliano, co-acting director, Division of Trading and Markets at the SEC, said, "Although [dark pools] report their trades in the public trade stream, the public reports merely indicate that the trade was OTC and do not identify the trading center that reported the trade." He noted that ATSs are responsible for a growing section of the market. "in recent years, dark pools have increased their percentage of total U.S.-listed trading volume to approximately 8.5%." One of the SEC's three main concerns about dark pools, he said, is "inadequate post-trade transparency rendering it difficult for the public to assess dark pool trading and to identify pools that are most active in particular stocks."

"The Commission has long been an advocate of post-trade transparency and has encouraged the markets to enhance the information made available to the public regarding transactions effected on exchanges and in the OTC market," Brigagliano said. "As the Commission has stated in the past, transparency allows all market participants to assess overall supply and demand. Transparency substantially counteracts the effects of fragmentation that necessarily characterize a decentralized market structure, without forcing all executions into one market. In addition, transparency can reduce the 'information gap' between investors with differing degrees of sophistication. Broad public disclosure of market information is necessary to assure the efficient pricing of securities, to maximize the depth and liquidity of the securities markets, and to provide investors with the opportunity to receive the best possible execution of their orders."

While currently ATS trades are reported to consolidated trade streams through FINRA, these reports do not identify the particular ATS that made a trade, Brigagliano noted.This "makes it difficult for the public to assess ATS trading and to identify the ATSs that are most active in a particular stock," he said. He also worried that requiring the ATSs to disclose trades in a way that identifies which dark pool did what would upset large investors by providing too much information about the parties to a transaction.

But in a press release today, several dark pool executives expressed support for the NYSE's new dark pool reporting facility.

"We're looking forward to the launch of NYSE Euronext's ATS transparency initiative," said Greg Tusar, head of electronic trading in the Americas at Goldman Sachs, which runs the most active dark pool in the U.S. "By publishing trading volume on its website, NYSE Euronext has spearheaded an industry-driven solution which provides a public source for evaluating broker-dealer ATS volumes."

"This initiative is an important step toward the standardization of trade volume reporting across ATS venues," said Frank Troise, Head of Equities Electronic Product at Barclays Capital. "Industry participants will be able to make more informed order placement decisions and thereby improve their execution quality."

"We need to maintain the right balance between vibrant public price discovery and individual execution preference," said Jon Ross head of GETCO Execution Services. "This initiative is an important first step in collecting the data critical to analyzing and preserving that balance."

Charlie Susi, Head of Direct Execution for the Americas at UBS Investment Bank, said, "The way the industry has advertised non-displayed volumes and crossing rates has been highly inconsistent " which makes it very difficult for clients to get a clear picture of liquidity. This initiative is something we're pleased to see, because it will establish better objectivity and clarity. We encourage all of our peers to join us in participating." The daily trading activity volume published by the NYSE facility will be based on trades reports that will be single-counted and matched-only.

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