Control conflicts of interest in 'dark pool' trading - FCA
By Huw Jones
LONDON (Reuters) - Dark pools, or anonymous share trading platforms, must handle conflicts of interest better, Britain's markets watchdog said on Thursday in a review that stopped short of proposing major changes ahead of tougher EU rules in 2018.
Dark pools are trading venues run by banks, brokers and bourses that differ from "lit" or public exchanges because share orders are not visible to other traders until they are executed.
They have attracted increasing scrutiny in recent years, amid claims by exchanges, regulators and lobby groups, that they distort market pricing and disadvantage traditional investors
The lack of pre-trade transparency is designed to help institutional investors, like pension funds and asset managers, to trade large blocks of shares without the market moving against them.
The Financial Conduct Authority's sector review looked at how dark pools promote themselves and manage conflicts of interest, such as if a dark pool's interaction with the operator's internal trading operations affects the quality of prices being offered.
It found that firms operating dark pools, a decade-old niche, have made significant progress in addressing the promotion and the management of conflicts of interest, but some improvements were needed.
"Pre-trade price transparency was not viewed as a significant concern so long as dark pools, which rely directly on prices occurring in the lit markets, remain relatively small versus those lit markets," the FCA said.
The watchdog found no failures to comply with regulatory requirements, but identified a number of areas for improvement.
Dark pools came under the spotlight in January when Barclays (BARC.L) and Credit Suisse (CSGN.VX) settled U.S. federal and state charges that they misled investors in their dark pools, with Barclays admitting it broke the law and agreeing to pay $70 million (£53 million).
In those cases, the two banks faced allegations they misled investors by saying they would protect investors from predatory high-frequency trading practices.
"The FCA review focussed solely on the UK market which has some key differences from other markets or regions. In particular the UK and US vary significantly, especially as to best execution, and behaviours seen in other markets have not been evident in the FCA’s review," the FCA said.
The European Union has reformed its securities rules and from January 2018 curbs on the volume of dark pool trading in any particular stock will be introduced.
Although Britain is leaving the EU, the FCA has said financial firms should still prepare for implementing the MiFID II securities reform.
As part of new trading terms with the bloc, Britain may still need to continue complying with EU rules in return for access to the single market.
(Additional reporting by Michelle Price; editing by Jason Neely and Susan Thomas)
