| LONDON, June 27
LONDON, June 27 Regulators are moving to shine a
light on "dark pools", opaque and quasi-anonymous trading
venues. New York's attorney general has filed a lawsuit against
British bank Barclays relating to its dark pool,
accusing it of giving an unfair edge to high-frequency traders
while claiming to be protecting other clients from them.
WHAT IS A DARK POOL?
Dark pools allow big blocks of shares to be traded
anonymously without publicly informing the market until the
trade is completed. This minimises the risk of the price moving
to the disadvantage of an investor should the market get wind of
the trade before it is executed.
If a fund manager wants to buy shares of a given company, a
dark pool will be able to match the order to sellers without
publishing the price or order details beyond guidance that the
price should be at the mid-point of a range.
On a public exchange, a trade could be costly for the buyer
if the bourse's publicly quoted data allow traders to spot the
tell-tale signs of a big lump of stock being traded. In a world
where trading is super-fast and electronic, the effect on the
stock price could snowball.
The popularity of dark pools has grown over the past decade,
alongside advances in automated trading technology, as new
trading venues have sprung up to compete with the dominant
bourses. A report by consultancy GreySpark Partners estimates
that dark pools account for 12 percent of U.S. equity market
flows. The figure for Europe is 10 percent and for Asia less
than 3 percent.
SO WHAT'S THE PROBLEM?
Increasing competition in the exchange world over the past
decade has led to the creation of many different versions of the
dark-pool model, with varying shades of transparency and
potential for market abuse.
Consultancy Oliver Wyman has identified three different
types of dark pool: those run by traditional exchanges, those
run by brokerages or banks and those run independently.
The exchange-sponsored pools offering equal investor access
have also attracted the high-frequency traders that some
investors preferred to avoid.
Some other pools, including those run by big banks such as
Barclays, offered investors the option to avoid certain types of
high-speed traders depending on their risk appetite.
The problem has become one of investor confidence and trust
in a system that was initially designed to help investors.
"For investors, this is the equivalent of going surfing ...
When you've got panels saying 'beware of the sharks', you know
you've got sharks," said Frederic Ponzo, managing partner at
consultancy GreySpark Partners. "It's when there is no sign and
you put your kids in the water that it's a problem."
WHAT ARE REGULATORS DOING ABOUT IT?
U.S. regulators are pushing for more transparency on the
part of dark-pool operators. Alternative trading systems now
report volume data to the Financial Industry Regulatory
Authority (Finra) and more banks have begun publishing details
of how their systems execute trades in the dark.
Some fines have been imposed. Pipeline Trading Systems paid
$1 million in 2011 to settle allegations from the U.S.
Securities and Exchange Commission (SEC) that it was misleading
investors by secretly allowing an affiliate to take advantage of
access to its dark pool's order flow.
Earlier this month dark-pool operator Liquidnet paid $2
million to settle SEC allegations that it had improperly used
its subscribers' confidential trading information to market its
services. Liquidnet has since said it has tightened up its
In Europe, dark pools also face more oversight as part of a
package of new rules known as "MIFID II". Under the outlined
plan, trading in a stock anonymously will be capped at 8 percent
of the total amount traded of that stock in the European Union.
Dark trading in a stock on an individual platform would be
restricted to no more than 4 percent of the total EU market for
(Reporting by Lionel Laurent; editing by David Stamp)