Dark pool users are failing to conduct sufficient due diligence prior to signing up with their trading venue of choice, the UK’s Financial Conduct Authority has warned.
In the Thematic Review on UK Equity Market Dark Pools, the watchdog said users don’t always have a clear rationale for why they are using a dark pool and some don’t have accurate data on the type of participants that use the pool.
While much of the report complimented and criticised users and operators in equal measure, the regulator said that it expected more of users in the form of background checks.
Pamela Gachara, capital markets specialist at the Investment Association, said: “We welcome the FCA’s thematic review on UK equity market dark pools. We note that one of the key messages from the FCA to users is about due diligence and the need to thoroughly understand what is happening in the dark pool and how this impacts outcomes - particularly given that there are best execution obligations under MiFID.
“To assist our members in conducting this due diligence, the IA and AFME have worked together to develop a due diligence questionnaire for the electronic trading of equities. This covers best ex policies, algo trading, BCNs and MTFs, TCA, client confidentiality and risks and controls. We are confident that this industry wide standard will make the due diligence process more comprehensive.”
The FCA report also flagged concerns that users of dark pools are not always aware of software changes which impact how these trading venues operate.
While some of the criticism for this was also laid at the door of operators for not communicating the changes adequately, users were expected to make a concerted effort to keep track.
The report added that both users and operators need to improve awareness of infrastructure changes to technology, which could have a knock on effect to the way dark pools operate.