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.
The FCA 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 markets, remain relatively small versus those lit markets.
The FCA has outlined some areas where improvements could be made for both operators and users. For operators these include:
- providing clear detail about the design and operation of a dark pool to users and, for investment banks, this includes describing precisely how their broker crossing network interacts with other components of their electronic trading platform;
- improving the monitoring of activity in their pools with a focus on operational integrity, best execution, client preferences and unwanted trading activity including market abuse;
- 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.
Best practice for users included being very clear about the rationale for using dark pools and conducting sufficient due diligence to understand thoroughly the operating model of each pool they access as there can be significant differences between pools. Users could also improve their monitoring of results versus expectations when using dark pools.
Andrew Bailey, chief executive of the FCA said: "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 review focussed solely on the UK market which has some key differences from other markets or regions. In particular the UK and US vary significantly, especially as to best execution, and behaviours seen in other markets have not been evident in the FCA's review.
The FCA encourages all dark pool users and operators to consider the findings of its review and will write to each of the participants in the review to request that action be taken to address areas of weakness or concern.