Dark pool scrutiny no slam dunk for traditional exchanges

Sun Jul 13, 2014 4:06am EDT
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By Lionel Laurent and Clare Hutchison

LONDON (Reuters) - 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 market share.

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."   Continued...

A logo is seen on a window outside of the Nasdaq MarketSite building in New York's Times Square, August 22, 2013.  REUTERS/Lucas Jackson