Insufficient regulation of dark pools is partly responsible for a lack of investor confidence in European capital markets, a Deutsche Boerse white paper has said.
The paper, which outline’s the German-headquartered exchange operator’s response to the European capital markets union envisaged by European Commission president, Jean-Claude Juncker, said OTC markets contributed to a lack of transparency which was offputting for investors.
While the paper recognises some of the benefits of dark pools, it calls on regulators to tighten up rules to ensure markets remain transparent.
“Dark trading on regulated trading venues…has clear benefits in terms of facilitating large block trades by institutional investors who do not want to move the markets with their activity,” the paper said.
“However, if unregulated, this inherent lack of transparency in and supervision of trade execution can make trading of this kind vulnerable to conflicts of interest, predatory trading practices and market abuse. Unregulated OTC trading fails to contribute to price discovery by definition.”
Deutsche Boerse added that, while MiFID II addresses some of the issues it has highlighted to some extent, more could be done to shed light on dark pools while maintaining the value they offer to institutional investors.
Major exchange operators have long been anxious that dark pools have taken trades away from the lit market and impacted price discovery since they became commonplace after MiFID I’s introduction in 2007.
However, supporters of dark pools say trading in the dark has long been a feature of the market, facilitated through high-touch brokers, and argue that reducing the ability of firms to trade without market impact would simply result in fewer trades taking place, rather than drive volume to the lit market.