* Regulators raise awareness of risks at some types of
* Exchanges will need work, effort to pull back share
* More volume seen increasing fees, data revenue
* Big fund managers still see appeal in dark pools
By Lionel Laurent and Clare Hutchison
LONDON, July 13 The regulatory noose is
tightening around dark pools, private share-trading venues that
promise anonymity for specialist investors, offering a chance
for rival exchanges in the United States and Europe to take back
But traditional stock-exchange operators such as LSE Group
, NASDAQ-OMX and Euronext can't just
expect business to drop back into their laps after years of
seeing market share slip away to more opaque platforms that
offer privacy or to upstart venues with slick technology.
A recent batch of enforcement actions against dark pools run
by big global banks, coupled with incoming rules in Europe that
aim to make markets more transparent by putting a cap on
dark-pool trading, has alerted investors to the risks of trading
in the murkier areas of the market.
The risks range from concern over a lack of disclosure about
how the pools operate and price trades to fears that some give
an unseen advantage to high-speed traders using sophisticated
technology and computer algorithms.
But in a tough environment where overall trading volumes
have yet to return to pre-crisis peaks, it will be no mean feat
to persuade professional investors drawn to the lower costs and
price stability of dark pools to change their habits and
concentrate more trades on a smaller number of venues.
"It is going to be a fight for the public exchanges," said
Matthew Coupe, director of regulation and market structure for
financial-compliance company NICE Actimize. "The dark pools are
not going to give up market share easily."
When contacted by Reuters, several exchanges highlighted the
growing momentum behind increased market transparency and said
they would work closely with regulators.
"Clearly dark pools are increasingly on the radar of
regulators," said Spanish exchange BME. "Operators of
regulated market platforms (are) well positioned to take
advantage of these changes and turn them into opportunities."
Competition in the exchange business has over the past
decade been promoted by regulators as a way to lower trading
costs for investors, whose market bets are now fed to multiple
The proliferation of dark pools, which today account for
around 12 percent of U.S. trading volumes and 10 percent of
Europe's, according to consultancy GreySpark, help match buyers
and sellers of big blocks of shares who might otherwise have
triggered big price swings on a traditional "lit" stock market.
The excesses of this fragmented system became apparent in
the wake of the financial crisis, when the combination of
depressed market activity and investment in high-speed
electronic trading opened the door to a sophisticated breed of
tech-savvy investors able to exploit venues' inefficiencies.
Market watchdogs are now flexing their muscles; Europe's
incoming package of proposed rules, known as "Mifid II", is due
to be implemented by 2017 under regulator ESMA and aims to cap
the amount of dark-pool trading in any given stock at 4 percent
per venue and 8 percent across all venues.
"The overarching aim is indeed to move the majority of
trading more into the light," a spokesman for ESMA said.
In the United States, which has seen even more fragmentation
than Europe, regulators have popular bank-run dark pools in
their sights. The New York Attorney General recently filed a
lawsuit against U.K. bank Barclays' pool LX, alleging
it lied to investors by giving high-speed traders unfair
Barclays is fighting the lawsuit.
Rival Goldman Sachs was also fined earlier this month
by Wall Street's self-funded regulator over pricing rule
violations stemming from its dark pool.
"The regulators at first were very keen for fragmentation to
increase competition and bring down the cost of trading, but now
we have seen the dark side of fragmentation as well," said Peter
Lenardos, analyst at RBC. "It's hard not to see how volumes
don't to some extent reconsolidate onto exchanges."
Even for large exchanges that have diverse revenue streams,
a 3 or 4 percent increase in volume would bring in greater
trading fees and potentially grow market data revenue, according
to Keefe, Bruyette & Woods analyst Niamh Alexander.
It will, however, take effort to put the fragmentation genie
back into the bottle and for exchanges to capture more volume.
Big asset managers remain the most mindful of the risks of
shutting off avenues for big block trading, with one trader
warning that it would hike costs, even as he acknowledged that
investors needed to do more due diligence on trading venues.
UK fund-management body IMA highlighted the positive reasons
for dark pools' existence, saying: "Investors choose these pools
as they are able to get more stable prices for their clients by
interacting with other long-term focused investors."
Sceptics caution that the time alone needed to get Mifid II
finalised and up and running - the consultation process is only
just underway - might diminish its impact and give time to
existing venues to adapt to additional proposed oversight.
And even taking into account the shifting regulatory sands
in the United States, few believe the dark pools will be fully
"What I think is that these dark pools may gravitate away
from investment banks," said Edmund Shing, portfolio manager at
BCS Asset Management. "It may be big asset managers that ask:
'Why don't we just set up our own trading system ourselves?'"
(Reporting by Lionel Laurent and Clare Hutchison; Editing by