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EU's Barnier throws spotlight on dark pool trades

Published 09/20/2010, 10:28 AM
Updated 09/20/2010, 10:32 AM

* Says may need tougher rules for anonymous trading venues

* NYSE Euronext says market opacity needs urgent action

BRUSSELS, Sept 20 (Reuters) - Dark pools, or anonymous trading venues, face tougher scrutiny from supervisors so they can spot risks more quickly, a top European regulator said on Monday.

EU Internal Market Commissioner Michel Barnier is reviewing the bloc's trading rules, known as the markets in financial instruments directive (MiFID), in light of advances in technology and fallout from the financial crisis.

MiFID was introduced in 2007 and unleashed fierce competition, resulting in cheaper trading, smaller order sizes, hammered margins, fragmented share prices and upstarts winning chunks of business from traditional exchanges.

Investors with large orders began using "dark pools" where prices, unlike on "lit" exchanges, don't have to be posted in advance of execution to minimise adverse market impact by revealing who is behind the trade.

Barnier told a hearing on his MiFID plans he envisaged significant changes when it comes to transparency, responsibly managing risk and removing conflicts of interest.

More visibility was also needed in bond and derivatives markets, he said.

"And we will look at pre-trade transparency -- including dark pools -- as well as review the current post-trade transparency rules in order to ensure an adequate level of transparency," Barnier told the hearing in Brussels.

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CIRCUMVENTING MIFID 2

The reform of MiFID has become a battle ground between exchanges in continental Europe and new trading venues such as Chi-X and BATS bidding to influence EU governments and the European Parliament which have the final say on MiFID reforms.

Growth of dark pools prompted exchanges like NYSE Euronext to launch copycat platforms while also calling for a crackdown on opaque trading.

Roland Bellegarde, head of European execution at NYSE Euronext, said there has been a dramatic increase in off-exchange trading and opacity in the past two years.

Lit trading in Europe has fallen from 76 percent of total trading in June 2007, just before MiFID was introduced, to 60 percent three years later. Dark trading has risen from zero to 2.7 percent over the same period, Bellegarde said.

"With about 44 percent of trading volume outside the lit market, we can actually question the validity of price formation provided in .. lit markets," he told the hearing.

"That is why regulation is crucial and urgent."

Bellegarde said the industry was already anticipating likely changes and asked whether reform could avoid being obsolete as soon as it hit the statute book.

"As I am speaking to you, operators and intermediaries have already analysed, anticipated, integrated and circumvented the new regulatory framework offered by MiFID 2," he said.

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