Regulators clampdown on dark pools

The agency broker failed to disclose information on order types to investment firms that were buying and selling shares on its private venue and as such has fallen foul of regulators in the US. 

This infringement is the latest in a line of cases involving alternative trading venues being found guilty of similar lapses in conduct. Such venues are used by asset managers to shift large blocks of shares without affecting the market price against them. 

Each day more than 30 per cent of trading in the US happens in these 'dark pools' that exist outside public exchanges. The culture has caused concern among regulators, for its possible affect on the public markets' capacity to show an accurate, up-to-date appraisal of trading prices. 

Exchanges maintain that dark pools operate by using reference prices of public markets, which in turn lose business. In addition, trade sizes in dark pools have now fallen to the size of transactions on public markets. 

Larry Tabb, Chief Executive of Tabb Group, speaking to the Financial Times online, labelled ITG "one of the largest 'agency only' asset managers" which was therefore open to higher standards and more intense penalties in cases of infraction. 

Other cases of a similar nature have seen Pipeline and Liquidnet pay fines totalling a couple of million dollars to the Securities and Exchange Commission (SEC). The clampdown on dark pools has intensified over the past year, with UBS paying fines of $14.4m relating to dark pool activity in January. Barclays has denied allegations that it has been involved in dark pool trading, while Hong Kong investors fined BNP Paribas last week for withholding information from investors.

Mr Tabb advocates technological improvements such as standardising and synchronising timestamps to increase transparency on the pathway of client orders through the system. On the other hand, the speed of the penalty process has fallen under criticism given the length of time - up to five or six years - for transgressors to be brought into line.  

Denis Ignatovich, a former Deutsche Bank trader, underlines the complexity of the issue, stating " it is physically impossible for the head of an electronic trading desk to have full understanding of all the nuances of their behaviour 'by hand'."

"If a developer or product manager introduces a 'feature' that, for example, unlawfully prioritises one set of clients versus another, it may take you a very long time to detect this by looking at the post-trade data alone" he adds.

Now nine of the world's largest asset managers have come together to create a not-for-profit venue called Luminex Trading and Analytics, while the Plato Partnership has been formed in Europe. The New York Stock Exchange and the London Stock Exchange Group are intending to bring in intraday auctions that will let traders place orders at specified prices; the trade does not hinge on an investor's speed in the market but matching bids and offers are made within a set timeframe.