Trading through “Dark Pools,” and in particular their use by High Frequency Traders, has been in regulatory focus for some time now. It is also an area that appears to have captured some public imagination following the publication of Michael Lewis’ Flash Boys in 2014, which precipitated enhanced regulatory scrutiny in the US.
This regulatory focus shows no signs of decreasing. Over the past year or so, there has been a noticeable increase in levels of enforcement action concerning dark pools, with action in the US and Hong Kong, and shows no sign of slowing down: on 31 January 2016, Barclays and Credit Suisse agreed settlements with US authorities totalling $70m (along with an admission of misleading investors) and $84m, respectively, relating to the operation of their dark pools and most recently, on 16 December 2016, it was announced that Deutsche Bank has agreed to pay to the SEC in the US $37m in connection with its dark pool platform.
Alongside actual enforcement, that more general regulatory focus on dark pools and high frequency trading is still very much in place. The Financial Conduct Authority in the UK has completed a thematic review of the use of dark pools, finding that operators are not always providing clear details about the pools’ design and operation to users; monitoring pools sufficiently to protect users from market abuse or to ensure operational integrity and best execution; and adequately identifying and managing conflicts of interest.
Enforcement activity usually increases following a thematic review, and it is important for operators and users of dark pools to consider the report carefully. Several operators are already being told by regulators to take specific remedial action, but enforcement has not been deemed necessary – yet. Unless operators and users take careful heed of the FCA’s recommendations, it will be a matter of time before that changes, and operators would be well-advised to address any potential shortcomings in the descriptions of their own dark pools and in the monitoring of their trading venues, while users should be wary of any trading strategies that could be construed as abusive.