There may now be more of an incentive to create greater regulation of dark pools in the UK following action taken against operators Goldman Sachs and Barclays in the US.
Last week, Goldman Sachs were fined $800,000 by the Financial Industry Regulatory Authority, the US securities regulator, for failing to ensure that trades executed in their dark pool were being made at the best price. The bank has already paid out $1.67 million in compensation to those affected by the trades.
Only last month, New York State filed a lawsuit against Barclays PLC, causing even greater damage to the image of already widely criticised dark pool trading. Barclays executives allegedly misled clients about the amount of high frequency trading that occurred in their dark pool.
The fine and lawsuit follows the US Securities and Exchange Commission (SEC) Chair Mary Jo White’s announcement that the SEC would review the transparency rules regarding dark pools in a bid to make them more open.
In dark pools, the price at which shares are offered for sale cannot be seen by anyone - even those participating in the exchange. The price at which shares change hands is only disclosed after the trade is completed. This allows traders to buy or sell large amounts or ‘blocks’ without other traders knowing that the sale is being made, preventing other traders from putting the price up or down and minimizing the block trade’s effect on the market.
Although they create the possibility of price improvement and lesser transaction costs, dark pools have been criticised for their lack of transparency and the potential to cause fragmentation and less efficient pricing. Last year, the CEO’s of NYSE Euronext, Nasdaq OMX and BATS Global Markets urged regulators to introduce rules permitting trades to only take place away from a public exchange if a customer is getting an improved price.
This has provided even greater incentive to increase trading venues' transparency and has also potentially opened up dark pool operators to wider legal action not only from US governmental agencies but also in the UK.
Contact Our Specialist Financial Crime Lawyers in London
For specialist legal advice about trading operations, please contact our solicitors on 020 7387 2032 or complete our online enquiry form here.
