[NEW YORK] Plans by the New York Stock Exchange to limit trading in so-called "dark pools" during an industry-wide experiment aimed at boosting trading in small-cap stocks have been put under review by the US Securities and Exchange Commission.
The proposed rules by Intercontinental Exchange Inc's NYSE governing broker-run private trading venues, known as dark pools, are more restrictive than originally approved by the SEC, the regulator said in a filing late on Monday.
NYSE's proposed rules are also more restrictive toward dark pools than proposals by rival exchange BATS Global Markets and the Financial Industry Regulatory Authority, prompting confusion and concern that the dispute could delay the two-year programme's October start date.
If "these different proposals are both approved by the Commission, member compliance with the differing rules would be virtually impossible," the Securities Industry and Financial Markets Association said in a letter to the SEC in December.
The disagreement involves the SEC's so-called "tick-size pilot," which will widen trading increments, or "ticks," for 1,200 smaller companies' stocks to 5 cents from a penny.
Many such stocks rarely trade, and the programme would test whether wider spreads would prompt market makers, which post buy and sell orders for others to trade against, to post more orders, making markets more liquid.
The wider spreads are also expected to drive more trading into dark pools, which compete with exchanges, but do not display trade sizes and prices to the public prior to trades taking place. Unlike exchanges, dark pools can execute trades in between the spread, potentially lowering brokers' costs.
When the SEC approved the programme, it included a provision that would force some types of trades in some of the stocks involved to stay on exchanges, but it also included exceptions.
NYSE's proposed rules would limit the ability for trading firms to use one of the exceptions, the SEC said in its filing.
NYSE justified the additional restriction as a protection against BATS' and FINRA's separate rule proposals, which would create a loophole that would "eviscerate" the on-exchange requirement, the exchange said in a letter to the SEC dated Jan 15.
The SEC said it was reviewing NYSE's rules in part to ensure they were not "designed to permit unfair discrimination," and they do "not impose any burden on competition that is not necessary or appropriate."