FSA looks into high-frequency trading and dark pools

The Financial Services Authority (FSA) is examining the impact of high-frequency trading and the use of dark pools on the UK equity market.

The review - which comes on the heels of a similar probe by the SEC in the US - is being conducted by FSA staff and Henry Knapman, a UBS veteran currently on a year-long secondment at the watchdog, says the Financial Times.

Knapman has been meeting asset managers and hedge funds over the last month to discuss how the emergence of dark pools and high-frequency trading has affected the equity markets.

The review is being styled as an exercise in information gathering and is not expected to lead to a formal report.

Equity markets have seen drastic changes recently, with technological advances increasing the prominence of high-frequency trading and the EU's Markets in Financial Instruments Directive (MiFID) paving the way for a plethora of new electronic trading platforms.

The FSA has recently green-lighted dark pools from Chi-X, Bats, Nasdaq OMX, Nyse Euronext and the LSE. However, earlier this year the regulator did deem Nyfix's Euro Millennium dark pool non-compliant with the latest interpretations of the MiFID rulebook.

Similar concerns in the US recently led to senator Charles Schumer calling on the SEC to ban "flash" trades, where users are given an advanced peek at unfilled orders ahead of the wider market.

The US watchdog had already outlined plans to step up its scrutiny of dark pools amid concerns about the risks posed to market transparency and integrity by the proliferation of off-exchange trading venues.

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Comments: (3)

Gary Wright 04 August, 2009, 12:20

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There is no doubt the markets are now more complex and require more technology to be able to take part. The big players have the systems and financial clout to play but at the detriment of tier two and three or smaller players. Its doubtful that the whole market is benefiting from so many electronic venues that appears to favour the great if not so good

The authorities should be working harder to create a level playing field and make the market order execution simple and transparant. This should not be by increasing the investment in technology by FS firms to take part

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Iosif Itkin - Exactpro - London 04 August, 2009, 20:16

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I would argue that the industry can offer solutions for tier two and three. LSE Baikal Liquidity Aggregation Service is a good example. On the other hand, I am not entirely convinced that strict limitations on pre-trade transparency waivers from CESR and other regulatory activity in the area of dark pools help establish a better marketplace.

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A Finextra member 05 August, 2009, 07:34

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This raises many more questions if the FSA and other regulators are seriously looking into developing an even playing field for all investors leading to transparent trading.

For example, regulators should not allow 'market moving' trades of single units by HF trading engines that purely support moving to numbers that trigger larger events in favour of the initiator's positions? These types of trades are limited to professional traders to the distinct advantage of their own positions and the disadvantage of all others.

Once upon a time 'market moving' trades were only considered to be so if they were large, however with the number of online investors growing exponentially it's time to recognise that major reform is needed for transparency at the very least.

Bring it on!