Introduction

While official reports have now declared the end of the recession, global regulatory action is gaining vigour. Like the great Terror of the French Revolution, no-one and nowhere is safe from investigation. In recent times, one such avenue under increased scrutiny pertains to the off-exchange trading books known as ‘dark pools’ – trades not displayed on order books. Equities markets functioned perfectly during the financial crisis and the finger of blame for the downturn has been pointed very firmly in other directions. However, regulators appear zealously committed to ensuring that such a crisis never occurs again.

Key findings

• Prevalence – Reliable statistics have proven hard to obtain, with wide disparities between quotes figures. In general though, trading under this guise is a much rarer occurrence in Europe than in the United States.
• Source of risk – While several market participants find no concrete rationale behind the intense regulatory focus, the lack of transparency and elusive data on the prevalence of dark pools underlie the source of the alarm.
• Regulatory action – Legislation in the United States and Europe appears to raise concern over the creation of a two-tier market, growing volumes of dark pool trading and the deepening fall of public confidence in financial markets as a consequence of a lack of transparency
• Effectiveness of regulation – Several participants believe that regulations are unnecessary. They are described variously as results of political expediency, misinterpretation of the source of the crisis and inability to recognize the benefits of dark pools.  There are fears that this form of trading may even seize to exist.

Conclusion

With regulation gaining currency, the prospect that the market for dark pool trading may be fundamentally altered is very plausible. However, it is uncertain whether regulation in its current form is adequately equipped to eliminate the perceived risks with this practice.  

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