An investigation by the Committee of European Securities Regulators (CESR) is expected to find that dark trading currently accounts for no more than 4% of overall European equity trading volumes.
The UK’s financial regulator, the Financial Services Authority (FSA), today presented its figures on dark trading volumes conducted on the internal crossing engines of leading banks with a UK presence. The banks are thought to include Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Nomura and UBS.
Like other national regulators, the FSA was asked by CESR to collate data on the level of dark trading within its jurisdiction, following conflicting claims on the dark liquidity volumes across Europe. Deutsche Bank was included in the FSA’s research even though the firm’s lead regulator is Germany’s BaFin.
A source that participated in the FSA’s research said that the final pan-European dark trading total is unlikely to exceed 4% of overall European volumes once CESR added the UK data to that of other national regulators such as France’s Autorité des Marchés Financiers (AMF) and the statistics available from non-displayed MTFs, which must publish their trading data under MiFID. AMF is the lead regulator for French brokers CA Cheuvreux, BNP Paribas and Societe Generale, which operates a crossing network called Alpha x.
If Europe’s dark trading volumes do turn out to be below 4%, it less probable that CESR will recommend restrictive action to the European Commission (EC). In an interview to be published in the Q4 2009 issue of The TRADE, CESR’s Secretary General, Carlo Comporti, said: “Where there are a large amount of trades executed outside markets that do not interact with the normal price formation process, the overall efficiency of the market would be at risk.” A number of broker-owned dark pools are not registered under MiFID as either MTFs or systematic internalisers and pressure has grown on brokers to classify the pools in accordance with the directive.
Although the EC is scheduled to conduct a review of MiFID before the end of 2010, CESR can recommend legislative action prior to the review process.
Regulators’ concerns over the threat of dark trading to market transparency and price formation were heightened in July when the Federation of European Securities Exchanges claimed 40% of European trading is conducted on an over-the-counter (OTC) basis, with 10-12% of this figure transacted in broker pools. According to the source, Europe’s regulators will look at new ways of quantifying levels of OTC trading in Europe’s equity markets in the New Year.