Global securities regulators are proposing a series of principles to guide oversight of so-called “dark liquidity”.

On Wednesday, the Technical Committee of the International Organization of Securities Commissions published a report outlining principles to help market regulators deal with issues concerning undisplayed, or “dark”, liquidity.

The report focuses on areas of the market that could be adversely affected by the rise of dark liquidity, including transparency and price discovery, market fragmentation, knowledge of trading intentions, fair access, and the ability to assess actual trading volume in dark pools.

IOSCO says that the six proposed in the paper are designed to:
> minimize the adverse impact of the increased use of dark pools and dark orders on price discovery;
> mitigate the effect of any fragmentation of information and liquidity;
> help to ensure that regulators have access to adequate information to monitor the use of dark pools and dark orders, and that investors have sufficient information to understand how orders will be handled and executed; and
> increase the monitoring of dark liquidity in order to facilitate an appropriate regulatory response.

Hans Hoogervorst, chairman of IOSCO’s Technical Committee, said that while the development of dark pools and dark orders may meet a demand in the market, they also raise regulatory issues that deserve scrutiny.

“The principles we are publishing today are aimed at addressing regulatory concerns that dark liquidity poses for markets and regulators in the areas of price discovery, market fragmentation and potential risks to market integrity,” he said. “The principles will provide regulators with the tools to develop and maintain an appropriate oversight regime aimed at addressing any potential risks posed by dark liquidity in their respective jurisdictions.”

Earlier this year, Canadian securities regulators held a meeting on issues surrounding the rise of dark liquidity, following the publication of a discussion paper last year. In the wake of that meeting, they indicated that they would be addressing a number of market structure issues, including considering additional transparency requirements for marketplaces; reviewing the practice of sub-penny pricing, new order types, data fees, innovations in electronic trading, including direct market access, and the impact of high frequency trading.

The consultation period on the IOSCO paper closes on January 28, 2011.

IE