The U.S. Securities and Exchange
Commission recently imposed a $1 million administrative
penalty against Pipeline Trading Systems LLC for
misleading investors in connection with the operation of its dark
pool. Pipeline was launched in 2004 as an alternative trading
system operating as a "crossing network" to facilitate
trades among institutional investors while minimizing market impact
associated with information leakage about their large buy or sell
orders. To that end, Pipeline advertised that to prevent pre-trade
information leakage, it would not reveal the side or price of a
customer order before a trade was completed. Pipeline also claimed
that all users were treated equally.
According to the SEC, Pipeline's claims were false and
misleading because one of its affiliates (a trading entity owned by
its parent company) filled the vast majority of customer orders on
Pipeline's system, by seeking to predict the trading intentions
of Pipeline's customers and trade elsewhere in the same
direction as customers before filling their orders on
Pipeline's platform. Accordingly, the SEC found that Pipeline
generally did not provide the "natural liquidity" it
advertised. The SEC further found that the trading affiliate was
given certain advantages not available to other users. These
included providing the affiliate with a FIX connection to
Pipeline's graphical user interface known as the "Block
Board", soliciting and receiving input from the affiliate
regarding the minimum order size for each stock, and providing the
affiliate with information regarding ATS features designed to
"predator proof" the system.
The SEC release quotes
Robert Khuzami, Director of the SEC's Enforcement Division as
saying that "[h]owever orders are placed and executed, be it
on an exchange floor or in an automated venue, whether dark or
displayed, one principle remains fundamental – investors
are entitled to accurate information as to how their trades are
Alternative trading systems compete with exchanges for trade
execution by providing alternative operation models, trades types
and fee structures to facilitate a wide range of execution
strategies. Crossing systems or crossing networks generally do not
offer price discovery but are intended to facilitate trades between
buyers and sellers who quote their prices on other trading systems.
Dark pools meanwhile, are trading systems that accept buy or sell
orders without pre-trade transparency (disclosure of the details of
the trade, specifically price and quantity).
In late October 2016, the federal government introduced Bill C-29, Budget Implementation Act, 2016, No. 2, which addresses a wide variety of topics, including proposed changes to the Bank Act (Canada).
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