The Securities and Exchange Commission (SEC) is planning to finalize two proposed rules intended to make stock trading more transparent to the public by the fall of 2018, according to the agency’s rulemaking agenda.
One proposal is intended to help institutional investors clearly understand their stock brokers’ decisions for routing trade orders to specific market venues. In Release No. 34-78309, Disclosure of Order Handling Information, the SEC also asks brokers to link the information to specific order-routing strategies. Customers will also get details about the fees collected or rebates returned by each trading center to which a trade was routed.
The second proposal offers an update to Regulation ATS, which governs alternative trading systems and has not been revised since 1998. In Release No. 34-76474, Regulation of NMS Stock Alternative Trading Systems, the SEC says the so-called dark pools and other alternative trading centers should provide more information to the public about their operations. The proposal was issued in November 2015.
The alternative systems are not regulated as national stock exchanges even though they match buy and sell orders for subscribers. The dark pools let subscribers post orders that do not have to be displayed on other market centers. The subscribers typically include large institutional investors, hedge funds and high-speed trading firms who want to avoid big price changes when trading large blocks of stocks.
If the rule is finalized, it would create Form ATS-N and require an alternative trading system that executes trades for shares listed on national stock exchanges to disclose information about the activities of the broker-dealer that operates the system and the broker-dealer’s affiliates. The alternative systems would have to provide information about the firms, or subscribers, approved to trade shares with them, the types of trade orders they honor, details about the network and technology supporting the systems, handling of trade orders, and fees, among other information that has not been made public previously.
SEC Commissioner Kara Stein has been pressing for the rules’ adoption because she believes transparency is the key to well-functioning capital markets.
“Investors need information and data in order to make informed investment decisions,” Stein said in a July 2017 speech. “If they don’t have it, they won’t invest or they will make poor investment decisions. This in turn will impact our businesses’ ability to innovate and create jobs.”
The comment letters submitted in response to the proposals largely support the changes, although some letter writers asked for changes to the rules before they are adopted in their final versions.
The letters from the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA) asked for a change to the definition of an “institutional” order in Release No. 34-78309, which sets different disclosure requirements for institutional and retail orders.
Institutional orders are typically those filed by large investors like hedge funds, mutual funds, private equity firms or wealthy individuals and their family offices. The proposal considers an order of more than $200,000 to be “institutional,” but the ICI said the commission should include all orders submitted by institutional investors because the $200,000 threshold will exempt about 83 percent of orders submitted by institutions and diminish the value of the proposed disclosures.
SIFMA said the monetary threshold has flaws because institutional clients often break up orders across several brokers. The aggregate of the orders may exceed $200,000, while individual trades fall below the threshold and are not subject to the reporting requirement. In addition, retail customers occasionally make trades with market values greater than $200,000, and SIFMA said a broker-dealer would be required to provide the required disclosures as an “institutional order,” which would create confusion.
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