Dark pools, flash orders and high frequency trading have received significant regulatory attention of late. On October 21, 2009, the SEC proposed rule changes
regarding dark pools. Dark pools are electronic networks that facilitate trading of shares outside of traditional exchanges and give certain investors the ability to trade large blocks of shares without notifying the entire market of the transaction. The proposed rules would require a greater proportion of stock quotes to be displayed and would restrict communication between dark pools. The overall goal of the proposed rule changes is to push more orders onto publicly displayed markets. The SEC also has recently proposed a ban on flash orders, a practice in which certain investors are privy to a quote for a short time before others can view that quote. See “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?
,” Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009). Finally, high frequency trading has been receiving significant attention of late, both from regulators and the press, broadly focusing on the question of whether the practice unfairly privileges traders with access to co-located computers on or near exchanges. See “Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?
,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009). The recent regulatory attention on these topics was the backdrop for a hearing on October 28, 2009 hosted by the U.S. Senate Subcommittee on Securities, Insurance and Investment. At the hearing, the Subcommittee heard testimony from regulators, industry participants and a fellow senator on, broadly, whether the current regulatory structure is up to the task of regulating the innovative, fast-evolving topics of dark pools, flash orders and high frequency trading. The Hedge Fund Law Report attended the hearing, and this article summarizes the points discussed at the hearing of most pressing relevance for hedge funds. Specifically, we offer significant detail on what was said, and what the tone and substance of the hearings may mean for regulatory developments in the near term with respect to dark pools, flash orders, high frequency trading and market surveillance.