FCA sets sights on cleaning up dark pools

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The FCA has published a thematic review into dark pools, the private networks where large trades can be executed without alerting other traders.

Firms operating dark pools – where prices are hidden until trades have taken place – have made “significant progress” in tackling conflicts of interest, the review found. The lack of pre-trade transparency in dark pools – which rely on prices in the open market – was not deemed to be an issue so long as they remain relatively small.

Areas of dark pools marked by the FCA as needing improvement include: a greater focus on operational integrity, best execution, client preferences and avoiding market abuse; providing clear details on the operation of dark pools for users and doing more to manage conflicts of interests, including frequent independent assessments.

Andrew Bailey, chief executive of the FCA, says: “It is vital that we have clean, effective and competitive wholesale financial markets. This review aims to address concerns about the operation of dark pools in the UK.

“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 has asked all dark pool users and operators in the UK to digest the review and will be writing to the participants to request action be taken where there are areas of concern.