BATS Warns Against Blanket Regulation For Off-Exchange Trade
March 15 2010 - 5:33PM
Dow Jones News
The top executive of BATS Exchange said Monday that off-exchange
electronic trading platforms should bear more regulatory
responsibility as they gather a greater share of U.S. stock trading
activity.
However, alternative trading systems like so-called dark pools
remain "separate and unique" from exchanges like BATS, and
regulators ought to resist uniformly applying tougher requirements
across all such venues, according to BATS Chief Executive Joe
Ratterman.
"In our view, an ATS with 0.05% market share should not have the
same regulatory weight as one that has 3% market share," Ratterman
wrote Monday in a letter to customers.
"An ATS that has, say 5% market share, is starting to look a lot
like a large public market and perhaps should begin to carry the
incremental weight of its peer registered exchanges," wrote
Ratterman, suggesting a "sliding scale" of responsibilities based
around trading volume.
Alternative trading systems include a host of different trading
venues, including electronic communication networks, crossing
networks and dark pools. The platforms facilitate stock trading,
but operate under a looser set of rules than regulated
exchanges.
Such platforms are prized by institutional investors seeking to
move large blocks of shares without alerting the public markets, as
well as high-speed traders looking to rapidly transact business
across a range of venues.
Alternative trading systems have expanded their slice of the
U.S. market in recent years, cutting into the business of stock
exchanges run by NYSE Euronext (NYX) and Nasdaq OMX Group Inc.
(NDAQ).
A February report from Rosenblatt Securities estimated 17 major
non-displayed U.S. trading venues accounted for 10.3% of stock
trading volume in January, a new record as broad market volatility
continued to decline from the height of the financial crisis.
The SEC has proposed new rules that would require alternative
trading systems to display orders if that platform's trading
activity in a particular stock exceeds 0.25% of daily volume, as
opposed to the current 5%, as well as new requirements around
disclosure and access.
Ratterman wrote Monday that "regulatory obligations, public
quoting requirements and fair access provisions might be better
implemented as a sliding scale based on the relative success (i.e.
market share) each platform achieves."
"This will ensure that new competition can continue to enter the
arena and challenge those ahead of them, spurring continuous
innovation and efficiency for our industry," he wrote.
Kansas City, Mo.-based BATS represents an ATS that evolved into
an exchange, a path now being pursued by rival Direct Edge, which
on Friday secured approval from U.S. regulators to convert its two
electronic trading platforms into exchanges in the coming months.
Direct Edge's total market share came in at 9.6% in February.
While most so-called dark pool venues constitute less than 1% of
overall U.S. stock trading activity, a few have developed
significant momentum.
The biggest is Credit Suisse's (CS) Crossfinder platform, with
2.2% of consolidated U.S. equity volume in February, according to
the Rosenblatt analysis. Goldman Sachs Group's (GS) Sigma X
accounted for about 1.6% of trading last month, while Knight
Capital Group's (NITE) Knight Link had 1.4%.
BATS' Ratterman noted that few, if any, of these venues will
pursue regulated exchange status the way BATS and Direct Edge have.
In these cases, he wrote, "we shouldn't put too much 'weight' on
ATS entities, but should attempt to find a balance of
responsibility that correlates to the relative size of the
ATS."
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com
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