It used to be okay when Brussels’ euro meddling was limited to the banalities of life, but the remarks attributed to Kay Swinburne (Conservative MEP for Wales) yesterday seem to show a dangerous misunderstanding of how European financial markets work. The concept that dark pools are “always bad” is naive on a number of levels. Firstly, the term ‘dark pools’ covers a whole host of different non-lit order matching services. These range from buy-side crossing networks, through discretionary broker services, to dark books operated by exchanges and MTFs. These different pools offer a range of different services to professional investors so that they can minimise market impact and achieve the best possible outcome for their orders. Secondly, the concept of trading off-exchange – or ‘in the dark’ – has existed for as long as the exchanges themselves. Many of the broker dark pools are simply automated versions of their traditional ‘upstairs’ activity that seek to deliver on the brokers’ fiduciary duty to get the best possible outcome for their clients. For many pension and traditional long-only funds the idea that they can, or should, trade the huge blocks they do on lit markets is bizarre. Take Liquidnet, for example, which prints average trade sizes that are hundreds or thousands of times larger than trades in the same stocks on lit markets. How does Kay think that orders of this magnitude are going to be transacted on lit markets?
Her apparent endorsement of the NYSE technologies European consolidated tape initiative is also worrying as she seems to think that the only alternative is for the taxpayer to foot the bill for a utility that provides this information. The real issue is simply about agreeing a set of neutral standards as to how the tape is compiled and reported to, and then the market can do the rest. Without these standards, we will just end up with a bunch of different proprietary, competing initiatives. How is that going to help improve transparency?
I just hope that either her remarks have been taken out of context, or she is just trying to provoke the debate on these issues. If not, then we have every reason to be worried about what else may come out of Brussels.