Cboe’s CEO says dark pools deserve more attention as exchanges face regulatory scrutiny

REUTERS/Frank Polich

Cboe Global Markets’ CEO Edward Tilly, in an interview with Business Insider, said regulators need to give more attention to dark pools.
Dark pools, which are used by firms to anonymously trade large blocks of stock, saw a 50% increase in trading volume from 2009 to 2018.
Tilly said traditional exchanges have gotten an unbalanced amount of regulatory scrutiny despite dark pools’ growing market share.

The Securities and Exchange Commission has increasingly shown an interest in how stock exchanges operate recently, but Cboe Global Market’s CEO Edward Tilly thinks it’s time to spread the scrutiny.

Cboe, Nasdaq and NYSE have all nabbed the regulator’s attention in recent months for their market data and exchange fees. Tilly thinks a growing segment of the market structure deserve the SEC’s time, too.

Tully said dark pools, private trading venues that allow participants to deal anonymously in order to avoid moving the market against them, haven’t received nearly the same focus as traditional exchanges.

"There is this whole other world out there, and guess what it, is growing faster than we are," Tilly told Business Insider in an interview at FIA’s International Futures Industry Conference on Tuesday. "Why is that? What is the driving force in the dark pool? Why is it picking up share from lit?"

See more: Nasdaq and NYSE are suing their regulator over a pilot they say could put some ETFs out of business

Dark pools are popular among Wall Street firms for moving large amounts of stocks, known as block trades, anonymously. However, information about how they operate is limited. Banks and brokers that run dark pools have faced significant fines in recent years

In July 2018, the SEC pushed to issue new rules requiring dark pools to disclose more information about how they run. At the time, 11% of stock trading occurred in dark pools, which was a 50% increase since 2009.

But in recent months regulators attention has shift toward exchanges, including plans for a pilot analyzing their transaction fees, which does not include dark pools, and an overall analysis of the fairness of their pricing.

"This is what you are finding the problem in markets?" Tilly said. "I think there is just way more [in lit markets] that is working, and other problems that have been absolutely ignored."

To be fair, most market participants would be keen to receive less regulatory pressure. But Tilly said he isn’t calling for regulators to completely leave traditional exchanges alone. Instead, he believes they should take a look at the entire marketplace, including the place where trading volumes have increased the most in recent years.

Exchanges have pushed back on the recent regulatory scrutiny. In February, Cboe, NYSE and Nasdaq, individually sued the SEC over its planned transaction fee pilot.

Tilly said the pilot is an example of trying to find solutions to problems that are hard to find. Meanwhile, Bryan Harkins, co-head of markets division at Cboe, pointed to the lack of inclusion of dark pools in the pilot as an issue.

"How much it trades away from the exchange, not mentioning it in the pilot, there is a bigger picture here," Harkins said. "We want to be part of that improvement in that solution, but we are narrowly focused. And that is where our objection was."

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