The International Organization of Securities Commissions, a think tank for the world's securities industry regulators, has called on its 180 members to consider reining in the practices of dark pools, TradersMag's Peter Chapman reports.  IOSCO's influential technical committee last week published a paper that acknowledges the benefits of dark pools but identifies a number of potential problems that need the attention of regulators. 

    First is Transparency.   The relative lack of both pre-trade and post-trade transparency, when compared with that of public exchanges, could damage the price discovery process as well as hamper the search for liquidity.  Up until now, IOSCO has largely dedicated its efforts to the regulation of public exchanges.  That is likely to change.  Specifically, IOSCO is concerned that dark pools (and exchanges' dark orders) don't publish their quotes;  nor do they contribute to pre-trade price discovery.  This opens up the risk of free-riding on the revealed intentions of other participants in the market.

    Second is Lack of Quote Info.   The absence of such information means that unless a liquidity seeker has the ability to send IOI's (indications of interest), the only way to find contra interest is to route an order to a dark pool.  Market efficiency can be affected by the frequent pinging of multiple dark pools.  Some suggestions for regulator:  (i) consider whether or not so-called "actionable IOIs" should be deemed quotations, and therefore displayed;  (ii) consider whether or not the ID of the dark pool should be revealed once a trade is consummated;  (iii) decide whether the dark pools should be ID'd on a real-time basis or at end-of-day, and whether dark pools should be ID'd on a trade-by-trade basis or in the aggregate.

The SEC, perhaps coincidentally, proposed 3 rulings last year dealing with dark pools' use of IOIs and post-trade reporting similar to IOSCO's recommendations.  The SEC has yet to rule on these.   [TradersMag, 11/3]