Citadel Securities has called for a crackdown on private rooms in its list of policy recommendations for the SEC.
The policy paper states that the growing use of alternative trading systems (ATS) in US equity markets requires a reconsideration of regulatory frameworks, arguing that protocols currently allow for a circumvention of best execution requirements. Citadel Securities particularly benefits from one such regulation, Regulation NMS, which requires brokers to direct orders to market makers.
A common complaint of ATSs is that they are overly opaque and insufficiently monitored. Citadel agrees, stating that trading protocols and arrangements with liquidity providers around private rooms are only minimally disclosed. Currently absent from reports are explanations of the processes behind private room establishment, the rationale for new order types exclusive to private rooms and how the rooms are governed, the company stated.
ATSs are governed by the SEC’s Rule 605, requiring them to disclose certain order execution information. However, Citadel Securities states that venues are dodging this requirement by labelling all orders as ‘not held’ and exempting them from the rule, leading to poor or absent execution quality reports. Under Rule 606, which covers order routing reports, the firm states that ATSs should be producing consistent, granular reports that explain where orders are routed within the ATS, such as to a private room.
Speaking to Global Trading earlier this year, market participants countered that private rooms make up a small subsection of overall ATS volumes, and that controversy around their opacity is disproportionate. Mett Kinak, global head of equity trading at T Rowe Price, observed: “Transparency around their size, their meaningfulness, is valuable. If people can see that an ATS has 2% of total market share, and that 2% of that share is in hosted rooms, they’d realise that there’s no big story.”
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ATSs currently represent 10% of total market volume in US equities.
Under existing regulations, ATSs are permitted to select who can use their platforms with impunity, so long as a 5% average daily trading volume threshold is not crossed on the security being traded. Citadel argues that these are “discriminatory practices”, particularly when private rooms are involved, a subsection of ATSs which allows firms to trade with an exclusive group of counterparties.
“ATSs should only be allowed to determine execution priority based on the characteristics of an order, and not the identity of the sender,” it states. Further, there is no obligation of best execution for ATSs or executing counterparties for retail orders executed in private rooms – meaning that retail orders can be pushed to the bottom of the list.
Citadel Securities argues that private rooms do not comply with Regulation ATS, introduced by the SEC in 1998. The firm states that these rooms “closely resemble the single-dealer systems that the Commission specifically excluded from the definition of an ‘exchange’. The notion of establishing a fully-siloed single-dealer system under the umbrella of an ATS does not appear to be contemplated by the regulation.”
Despite Citadel Securities’s insistence of “the problematic growth of private rooms on ATSs”, others in the market argue that the company is running a similar operation themselves.
“They wouldn’t call themselves hosted rooms because they have their own venues, but [single-dealer platforms like Virtu and Citadel] are essentially doing the same thing, just operating the venue itself,” Kinak affirmed.
