By Thomas AhmadifarAssociate Managing Editor

On September 30, 2013, the Financial Industry Regulatory Authority (FINRA) filed a rule with the U.S. Securities and Exchange Commission (SEC) to better regulate Alternative Trading Systems (ATSs).[1]  ATSs, which come in many forms, provide traders with alternative mediums to trade stocks outside of the traditional stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ.[2]  ATSs have grown in dominance to now account for over a third of all trading.[3]

The FINRA rule proposal is one of the first definitive steps in the United States to better regulate ATSs.  Under the proposed rule, ATSs would have to provide FINRA with a weekly report comprised of the number of trades for each security.[4]  FINRA would then post the weekly reports on a public website.[5]  The proposed rule comes on the heels of a historic joint-lobbying push by the three major exchanges- NYSE, NASDAQ, and BATS Global Markets –in April 2013 to have regulators implement new rules for ATSs.[6]

The growth in ATSs has caused many to worry about new risks of trading in both on and off exchange markets. For instance, one principal type of ATS is known as a “Dark Pool,” which is a private electronic exchange run by an entity (often a large bank) that allows buyers and sellers to anonymously trade large volumes of shares at a single price.[7]  Opponents of Dark Pools argue that at present, Dark Pools are not required to report their trading volume.[8]  In April 2013, Credit Suisse, which runs the world’s largest dark pool (Crossfinder), decided to stop disclosing its trading volume.[9]  The privacy of Dark Pools provides an advantage to subscribers, who have access to trading opportunities at prices not necessarily available to the public. In addition, without full accounting of trading volume, reported prices of stocks based on public information may not reflect the accurate value of the stocks because they do not incorporate all trades and prices.

One other major criticism of Dark Pools is the inherent risk of conflicts of interest and trading on private information. Because many operators of Dark Pools also have trading desks, there are risks that the owners of the Dark Pools may inappropriately “front run” trades in their own Dark Pool.[10]  The SEC has already brought an enforcement action against a Dark Pool operator for failing to disclose to its subscribers that it was selling their confidential trading information to an outside firm.[11]

The proposed FINRA rule would minimize many of the risks of ATSs.  By bringing ATS trading information to light on a weekly basis, the rule would help public stock prices adjust (at least) weekly to additional private information.  This would allow smaller non-institutional investors trade with similar information as the larger investors who can afford to subscribe to a Dark Pool or other ATS. It may decrease the advantage of trading on an ATS to the benefit of traditional exchanges, since prices in both public and private mediums may converge. In addition to price, it will also alert smaller investors to the stocks that may be more or less valuable based on volumes exchanged.

The FINRA proposed rule does not necessarily address the inherent risks of ATS operators front running trades.  In a world of high frequency trading where millions of shares are exchanged in a matter of seconds, a week is an eternity to wait to release ATS trading information. However, the proposed rule does at least increase the amount of available public information, which is the core principle of all securities regulation. It would aid the public exchanges in facilitating trades at prices that better reflect the true value of a stock, and it would help decrease the gap between institutional and private investors.


[1] John McCrank, U.S. Securities Watchdog Proposes New Rules for “Dark Pools, Reuters, Oct. 1, 2013, See generally U.S. Securities & Exchange Commission, Notice of Filing of Proposed Rule Change to Require Alternative Trading Systems to Report Volume Information to FINRA and Use Unique Market Participant Identifiers, Release No. 34-70676 (2013) [hereinafter FINRA Proposed Rule], available at

[2] See Nathaniel Popper, As Market Heats Up, Trading Slips into Shadows, N.Y. Times, Mar. 31, 2013,

[3] McCrank, supra note 1.

[4] Id.

[5] FINRA Proposed Rule, supra note 1, at 1.

[6] See Nathaniel Popper, Exchanges are Moving to Curb Private Trades, N.Y. Times, Apr. 8, 2013,

[7] See Haoxiang Zhu, Do Dark Pools Harm Price Discovery? 1 (2013), available at

[8] McCrank, supra note 1.

[9] Id.

[10] Front Running,, (last visited Oct. 20, 2013) (“The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information.”).

[11] Press Release, U.S. Securities & Exchange Commission, SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information (Oct. 3, 2012), available at

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