* Regulators set out ground rules for dark trading

* Public comment period closes Jan. 10 (Adds details, quotes)

TORONTO, Nov 19 (Reuters) - Canadian regulators laid down proposed ground rules on Friday for the trading of “dark liquidity” in a bid to strike a balance between promoting competition here and protecting investors.

The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) issued a position paper on a framework related to the size of dark orders and the ability to improve pricing by those who want to trade in the dark.

Those possible changes aim to set a minimum size for dark trading, as well as to ensure dark orders don’t trade ahead of light orders.

“What we’re trying to do is proactively address issues related to dark liquidity and make sure that we have a robust regulatory framework in place,” Susan Greenglass, director of market regulation at the Ontario Securities Commission, said in an interview.

Dark pools are mostly anonymous, off-exchange stock trading venues where traders can match orders while concealing price and volume. By allowing traders to hide their cards, the pools limit the impact on stock prices before an order is complete, reducing costs for the trader.

The public comment period closes on Jan. 10, 2011.

Alison Crosthwait, director of global trading strategy at Instinet, said regulators are attempting to “draw a hard line.”

“They’re definitely making a call. They’re not letting the markets evolve as they have been. They’re saying that they are OK with dark, but only if the orders are large, if they don’t take priority over light,” she said.

“They’re saying it can be here but it can’t just proliferate willy-nilly.”

The emergence of dark pools has raised concerns that their anonymous nature means that stock pricing may not be transparent.

Crosthwait said if the rule-making stays on the current track, owners of the “light markets” stand to benefit because their orders are given priority, while institutional investors may also do well because dark trades will be required to be substantial in size.

On the flip side, current and prospective owners of dark pools may have to digest the rule plans “and think about their business models,” she added.

There are currently two dark pools operating in Canada, Match Now, operated by TriAct Canada Marketplace, and Liquidnet Canada, which caters to the buy side.

Instinet 8604.T, Credit Suisse CRP.N, Goldman Sachs GS.N and Morgan Stanley MS.N have indicated they are considering launching dark pools in Canada. (Reporting by Jennifer Kwan; editing by Rob Wilson)