Exchanges seek rules to rein in dark pools

WASHINGTON — Three large stock exchanges are lobbying for limits on dark pools and other competitors, arguing that too much trading is hidden on private venues, creating more cost and volatility in public markets.

Chief executives of NYSE Euronext Inc., Nasdaq OMX Group, and Bats Global Markets Inc. have met over the past two months with lawmakers and the Securities and Exchange Commission. They seek a rule that could divert more orders to exchanges.

The exchanges say more than a third of all stock transactions occur without pre-trade prices being made public, up from 16 percent in January 2008. They are pressing the SEC to make market restructuring a priority under its new chairman, Mary Jo White.


‘‘We are protecting the sanctity of the public quote, and you can expect us to continue to protect it with meetings we’ll be having and raising awareness of the issue in a very public way,’’ said the NYSE’s chief executive, Duncan Niederauer.

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Dark pools, which don’t publish bids or offers on shares, were set up to allow large investors to trade big blocks without having news of their orders move the price. NYSE and its peers contend the original rationale no longer applies because the average trade size in dark pools has fallen to about 200 shares. As a result, the private venues are becoming less-regulated versions of traditional exchanges, they say.

The exchanges want a ‘‘trade-at’’ rule that would require brokers to route an order to an exchange unless they can improve on the best public quote by a defined amount. Since Canada imposed such a rule last year, quoted spreads and volatility have fallen, the exchange’s CEOs say.

Brokers and operators of dark pools say there’s no evidence that off-exchange trading hurts investors. Academic studies have come up with varying results. Some found that dark trading is associated with wider bid-offer spreads on stocks and higher levels of volatility, while others have concluded it’s associated with lower costs and better prices.