Dark Pools May Face Pricing Rules, EU Securities Watchdog Says

By Ben Moshinsky

Jan. 18 (Bloomberg) -- The European Union’s top securities supervisor is considering imposing price disclosure rules for trades made in “dark pools,” to bring the off-exchange venues into the spotlight of regulators.

The Committee of European Securities Regulators is collecting data on dark pools to address concerns including “pricing, transparency and reporting,” Eddy Wymeersch, CESR’s chairman, said. Dark pools are trading platforms that allow investors to buy and sell securities away from regulated exchanges so they don’t have to disclose positions.

Dark pools are at the centre of a regulatory storm as U.S., European and U.K. securities watchdogs scrutinize market structure, responding to the worst financial crisis since the Great Depression. The U.S. Securities and Exchange Commission proposed rules on Oct. 21 that would require dark pools to publicly report some bids once they handle 0.25 percent of a stock’s average daily volume.

“If the price difference is big enough between dark pools and the main markets then we will have to have more price reporting,” Wymeersch said in a telephone interview in Brussels.

The lack of reliable information on volumes and pricing of securities in dark pools has posed a problem for regulators trying to keep pace with market innovation.

“We’re still in the process of figuring out how it works,” Wymeersch said. “It’s easy to collect the figures, but the question is whether those figures are reliable. According to some figures I have, the overall use of over-the-counter markets” has decreased.

Dark Pool Figures

Regulators dispute how much trading banks carry out in dark pools. The U.K.’s Financial Services Authority says dark pools account for 1.25 percent of trades, whereas the Federation of European Securities Exchanges estimates the figure is closer to 40 percent.

Brokers such as Goldman Sachs Group Inc. and ICAP Plc operate dark pools for their clients, as do European bourses NYSE Euronext and Deutsche Boerse AG. London Stock Exchange Group Plc will likely complete the merger of its Baikal dark-pool unit with rival Turquoise in March.

The European Parliament is discussing amendments to a legislative package which would convert CESR into the European Securities and Markets Agency, with more powers.

Wymeersch said that CESR would grow from 35 to 85 employees and upgrade its IT and data storage systems once it receives a stronger regulatory mandate next year.

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net