Concern lingers over dark pool regulation

An FCA survey, published last Thursday, scrutinises off-exchange equity trading and describes the state of banks' regulation as "weak." Broker practises with dark pools is already regarded as an area that needs more supervision.

The study came as part of a global wave of regulation checks into trading that takes place away from the main exchanges. 'Dark pools' are among platforms on which prices are revealed only after a trade has finalised. They have become increasingly popular and now take up around 8 per cent of the market in Europe. 

Fund managers in particular take advantage of the alternative trading platforms, where high volumes of shares can be placed without other investors knowing. On a public stock market, the same behaviour can be seen by market competitors and can lead to prices falling. Such grey areas have bred controversy over dark pools and made them tricky to regulate. 

While regulatory machinations in the States have forced banks to make improvements, the FCA found that more still needs to be done on this side of the pond.

"Monitoring of activity, controls and client preferences and reporting thereon to clients, with a few exceptions, was weak among BCN operators", the study concluded. 

"The classification of clients by type, activity or order flow, if done at all, was not always performed in a consistent manner" it added, while asserting that UK dark pools varied from those in the US. 

Speaking on behalf of the FCA, the watchdog's Chief Executive, Andrew Bailey said:

"It is vital that we have clean, effective and competitive wholesale financial markets. Advances in technology have had a huge impact on equity markets which, in turn, give rise to new forms of conduct risk."