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Reports US

US stock market daily report (April 11, 2014, Friday)

April 14, 2014, Monday, 05:31 GMT | 00:31 EST | 09:01 IST | 11:31 SGT
Contributed by Millennium Traders


Investors may not be getting the best prices for their trades because of "dark pools', per the U.S. Securities and Exchange Commission. Due to the amount of trading done via dark pools, publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is. Proposed reform from U.S. securities regulators involved in policy making includes testing that could drive business to major stock exchanges and away from alternative trading venues such as "dark pools". The proposed reform could limit how much trading occurs inside brokerages as well as in "dark pools". Concerns are heightened by some regulators and academics about the increasing level of trading that occurs outside of exchanges. The New York Stock Exchange and Nasdaq OMX have long been seeking a method to win back market share from off-exchange competitors such as Credit Suisse's Crossfinder, one of the largest dark pools in the United States. The measure under consideration by the SEC, in its early stage, is referred to as a "trade-at" rule and would need approval of the full five member commission, as part of an order instructing the public exchanges to carry out the study.

The pilot program would only apply to a small number of thinly traded stocks, as part of a broader study exploring ways to incentivize more active trading in smaller and mid-sized company stocks. A "trade-at" rule would force brokerages and "dark pools" to route trades to public exchanges, unless the trades can be executed at a meaningfully better price than available on the public market.

Six years ago in 2008, 16% of all stock trades within the USA occurred "off exchange". Today, nearly 40% of all stock trades within the USA, occur "off exchange". These trades include those made by Main Street America traders that go through various brokerage firms.

SEC requires trades to be executed at the best available bid or offer however, "dark pools" do not publicly disclose bids and offers. Exchanges are light on regulation for "dark pools" which have increased in popularity since they allow firms to avoid paying exchange fees. Large investors are known for using "dark pools" since they prevent their large blocks of trades to tip off the broader market. Similar dark market programs are offered to clients from brokerage firms.

The SEC is expected to propose a "trade-at" test that would be incorporated into a broader "tick size" pilot - currently under development - to study whether widening increments which stocks are priced, could create incentives for an increase of trading in small and mid-sized companies. During 2012, the Jumpstart Our Business Startups (JOBS) Act initiated the "tick size" pilot that required the SEC to consider a pilot to study whether allowing smaller company stocks to trade in wider increments might help spur more trading in them. In April 2001 the SEC ordered all U.S. stock markets to switch to the decimal system which reduced costs for investors in large companies. Smaller companies suffer with limited trading because brokers face a more difficult time, turning a profit. The result is that many small companies are almost impossible to trade and many become illiquid.