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11 Oct 2011

Latest update on Dark Pools

Posted in Fresh Thinking

In January global3digital published its white paper Bringing Light to Dark Pools on the issue of electronic trading.. We highlighted concerns around transparency of pricing data (how can you do IR when you don’t know where your share price is?), and of inefficient price formation (are investors buying/ selling at the ‘best’ price?

On September 19th, the BIS published the conclusions of its own academic study, which broadly support the conclusions highlighted by Global3digital. The rise and rise of HFT, and of new algorithm based technologies have contributed to short termism in the equity markets, as well as the issues above.

The most intriguing references are in the conclusion. “It is reasonable to speculate that the number of human traders involved in the financial markets could fall dramatically over the next ten years.” And “Formulating appropriate policy responses to such potential threats is a matter for further consideration.” Regulator-speak for more rules.

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Meanwhile, the European Fund and Asset Management Association (EFAMA) has published a Blueprint for a European Consolidated Tape (ECT) which aims to provide greater certainty to investors about prices, best execution, valuation and performance measurement, thereby leading to further reductions in the cost of trading for investors.

While the liberalisation of trading venue regulation under the Markets in Financial Instruments Directive (MiFID) has brought benefits to market participants, it has also exposed weaknesses in the regulation of data quality and aggregation thus making it difficult to determine market prices and volumes with certainty. As a result of the inability of the market to offer efficient and comprehensive data solutions, the blueprint contemplates a single official ECT. Should commercial solutions be found ahead of any imposed ECT, EFAMA believes that the European Securities and Markets Authority will still need to set and supervise standards.

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