European Union politicians are currently debating rules to restrict off-exchange trading to eight percent of the total amount traded in any particular stock. The idea is to force more trading on to traditional lit exchanges, reducing fragmentationion and improving price transparency.

However, the proposals have the potential to inadvertently create greater opacity as well as seriously impact institutional investors' ability to execute order flow, says Tabb Group.

Drawing on new research among market participants, the analyst house says 86% of investors have "serious concerns" regarding the introduction of volume cap proposals with the vast majority anticipate being forced to return to more traditional forms of execution.

Tabb senior research analyst Rebecca Healey says European investors are increasingly using the anonymity offered by dark pools to take more control of their order flow. The increased usage of FIX Protocol tagging, venue analysis and TCA allow greater post-trade transparency, which provides the correct level of pre-trade transparency without negatively impacting the institutional trader in the process.

"Ultimately, this offers the buy side improved choice in venue selection," says Healey "As such, 98% of institutional investors tell us that they now prefer to access alternative liquidity pools in their hunt for anonymity and reduced market impact."

However, the ability to reduce the signaling of trading intentions has been compounded by an overall decline of European trading volumes by 49% since 2008. "Combine this with a reduction in available risk capital for the majority of European buy-side participants," says Healey, "and it's easy to see why protection, liquidity and price improvement institutional investors find in the dark are hard to ignore."

She says regulation would achieve greater transparency by 'cleaning up' dark trading, clarifying the rules within an appropriate framework to maintain choice for the benefit of the underlying investor, rather than obliterating dark pools in their entirety.

"Frankly, now is the time for dark trading to come clean," says Healey. "It's really a question of clarity."

EU politicians are still mulling over the proposed rule changes, but are aiming to have final plans in place before the year-end.