The continued operation of at least two of Europe’s operators of “dark pool” block trading facilities has been thrown into doubt by a regulatory probe into whether they are complying with the rules under which they were first allowed to operate.
The development is a sign of the growing scrutiny faced by dark pools and other equity trading venues in the region as regulators grapple with the effects of the financial crisis.
It could disrupt plans by other dark pools to launch in Europe at a time when the fragmentation of the region’s equity markets offers opportunities for the new types of trading platform.
Dark pools allow the anonymous trading of large blocks of shares away from the “public order book” on an exchange or alternative trading platform. Prices are only made public after trades have been matched.
They are popular in the US and have been growing in number in Europe since the passage of Mifid, the Brussels directive liberalising share trading across Europe.
Last year two US-based independent operators of dark pools, Liquidnet and Nyfix, were authorised by the Financial Services Authority, the UK watchdog, to operate pan-European dark pools based in London.
Mifid requires that trading platforms show that they are as transparent as possible in how they display pre-trade prices but allows waivers for operators of dark pools from such a requirement if they meet certain conditions.
According to people familiar with the matter, the FSA has told Liquidnet and Nyfix’s European dark pool, known as Euro Millennium, that neither are Mifid-compliant, casting a cloud over their continued viability. The move is part of what the FSA has said is a routine examination of Mifid compliance across the industry.
The FSA has told the dark pool operators that any modifications the dark pools make to achieve compliance will be referred to the Committee of European Securities Regulators (CESR), the Paris-based co-ordinator for Europe’s national securities regulators.
One person involved in one of the dark pools said the development had made it impossible to continue with plans to expand into new European markets or invest in new technology, such as order routing. “We are in this grey area,” the person said.
The FSA declined to comment on any specific cases. But it said: “We would discuss the issue of compliance with our rules with firms where we believe they were not currently compliant.”
At the same time, CESR this week decided that the issue of pre-trade transparency waivers in any future applications to set up dark pools in Europe would be scrutinised by CESR. The move was part of CESR’s mission to achieve “much greater convergence” in European regulators’ supervisory activities.
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