Calls for more scrutiny by exchanges and exchange federations on dark pools for stricter regulation or even ban them, were not shared today by London’s Stock Exchange new CEO, Xavier Rolet, who took the helm of Europe’s oldest independent exchange in May after serving as CEO of Lehman Brothers France.
Rolet said that the so-called dark pool trading systems, which can be defined as unregulated execution venues that do not to provide public quotes, contribute to the stability of markets and are necessary to prevent volatility caused by large movements of assets.[Bloomberg] The “need to effect large crosses of risk not just for equities, but for fixed income, foreign exchange, for many asset classes, matches the needs of corporates, investors and intermediaries,” the bourse chief said. “That need has existed for decades and will continue to exist..The key question, the billion-dollar question, is how do you construct venues that provide for an efficient, smooth transfer of that risk while potentially providing protection for investors who are using lit venues,” said Rolet. “What we are proposing in Europe is a little different. We are proposing a mixed venue. We believe it may be an interesting proposal to put forward to regulators in Europe.”
Dark pools are seen as competing with the displayed markets as they route orders to one another while exposing flow to other alternative trading systems in the hunt for liquidity. Brokers such as Goldman Sachs (GS) operate dark pools for their clients, as do European bourses including the LSE, NYSE Euronext, which launched SmartPool in Feburay, and Deutsche Boerse AG…created Xetra MidPoint last year.
Approximately 10 to 15% of all trading activity in Europe is executed in dark pools, according to John Wilson, CEO of Baikal – LSE’s European MTF dark pool and liquidity aggregation service.