By Gbenga Agbana

Thursday, 28 Oct 2010

The Technical Committee of the International Organisation of Securities Commissions, on Wednesday, published a consultation report, titled, ”Issues raised by dark liquidity,” containing the principles to assist securities markets authorities in dealing with issues concerning dark liquidity.

A statement obtained by our correspondent from the headquarters of the organisation in Madrid, Spain, on Wednesday, signed by the Head, Media, Mr. David Cliffe, said, the principles were designed to minimise the adverse effect of the increased use of dark pools and dark orders in transparent markets on the price discovery process.

Dark orders are orders that do not provide pre-trade transparency.

The principles will also help to mitigate the effect of any potential fragmentation of information and liquidity; help to ensure that regulators have access to adequate information to monitor the use of dark pools and dark orders and help to ensure that investors have sufficient information so that they are able to understand the manner in which orders will be handled and executed.

They will also increase the monitoring of dark orders and dark pools in order to facilitate an appropriate regulatory response.

Giving further details on the principles, the Chairman of IOSCO‘s Technical Committee, Mr. Hans Hoogervorst, said, ”Global equity market structure has undergone significant changes in recent years. One result is that in many jurisdictions, the search for best execution by market participants now involves the consideration of multiple sources of liquidity for equity securities.

“These include exchanges and non-exchange trading venues, such as alternative trading systems and multilateral trading facilities, which have developed new and innovative trading functionality to attract and maintain their order flow.”

He added, ”One such innovation is the expanded use of dark liquidity and the development of so-called dark pools and dark orders.

However, while these innovations may meet a demand in the market, they also raise regulatory issues that merit examination.

”The principles we are publishing today are aimed at addressing regulatory concerns that dark liquidity poses for markets and regulators in the areas of price discovery, market fragmentation and potential risks to market integrity.”

He said the principles would provide regulators with the tools to develop and maintain an appropriate oversight regime, aimed at addressing any potential risks posed by dark liquidity in their respective jurisdictions.

The technical committee, in developing these principles, focused on a number of areas, which had been identified as possibly having adverse effects on the market.

These include transparency and price discovery, market fragmentation, knowledge of trading intentions, fair access, and the ability to assess actual trading volume in dark pools.

Source: Punch