On 20 May 2011, the International Organisation of Securities Commissions (“IOSCO”) published a final report on principles for dark liquidity.
The report sets out six principles for regulators, trading venues and general users of dark liquidity, to address regulatory concerns in the following areas:
- pre- and post-trade transparency;
- incentives for using transparent orders;
- reporting to regulators;
- information available to market participants about dark pools and dark orders; and
- regulation of the development of dark pools and dark orders.
The principles establish that pre- and post-trade transparency are central to promote the efficiency of the market and the integrity of the price formation process. The report recognises that a one-size-fitsall approach may not be appropriate for all types of trading. It also notes that a number of jurisdictions are currently reviewing their regulatory regimes, including regulation of trading in dark pools and the use of dark orders in transparent markets.
The report recommends that regulators consider the structure of their respective markets as a whole to determine how best to implement the principles. In particular, regulators should seek to ensure that the principles are implemented in a way which:
- aims to maintain the efficiency of the market and the integrity of the price formation process; and
- where appropriate, allows for the use of dark pools and dark orders for specified needs or trades.
The report acknowledges the various industry and regulatory developments in this are and recommends that regulators continue to monitor trends in trading conducted through dark pools and dark orders. IOSCO intends to review the principles in the light of market and regulatory developments.
