UK dark pools looking cool
Firms operating dark pools have made “significant progress” in addressing the promotion and the management of conflicts of interest, according to the UK’s Financial Conduct Authority (FCA).
Dark pools are trading venues with no-pre trade transparency where the price and volume of all orders are hidden and anonymous.
Andrew Bailey, chief executive of the FCA, says: “Advances in technology have had a huge impact on equity markets which, in turn, give rise to new forms of conduct risk. Similar changes are underway across other products and markets so it is important for boards and senior management to read across, and apply what they have already learned, to rapid changes occurring elsewhere.”
The FCA considered the promotion undertaken by dark pool operators, the quality of the identification, management and disclosure of conflicts of interest and also reviewed relevant governance, oversight and controls.
It found that users of dark pools “welcome” the additional liquidity, the lower risk of information leakage on trading activity and the “beneficial impact potential” on pricing and costs that dark pools offer.
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 (light pool) markets, remain relatively small versus those lit markets.
The FCA has outlined some areas for improvements:
- providing clear detail about the design and operation of a dark pool to users;
- improving the monitoring of activity in their pools;
- doing more to identify and manage conflicts of interest – including the strengthening of policies and procedures for oversight and escalation and regularly refreshing independent assessments.
The full 63-page report, “UK equity market dark pools – Role, promotion and oversight in wholesale markets”, can be found here.