On July 21, 2016, the FCA published the findings of its thematic review of the UK equity marketplace, focusing on dark pools and broker crossing networks. The FCA examined promotional activity and the identification and management of conflicts of interest by dark pool operators, as well as issues of governance, oversight and controls. The report is based on the definition of “dark pool” as a trading venue with no pre-trade transparency, such that all orders, prices and volumes are anonymous.

Overall, the FCA found that users welcomed the additional liquidity, lower risk of information leakage and the potentially beneficial impact on pricing and costs that dark pools offered. The FCA also noted that investment banks have made significant improvements in addressing the promotion and management of conflicts of interest around dark pools, although more could be done in such areas as platform design and comprehensiveness of monitoring. Operators could improve transparency by providing clear detail about the design and operation of the dark pool to users. When interacting with investment banks, operators could describe how their broker crossing network interacts with other components of their electronic trading platform. The FCA considers that operators could improve monitoring activity in their pools by focusing on operational integrity, best execution, client preferences and unwanted trading activity such as market abuse and should also do more to identify and manage conflicts of interest. The FCA also highlighted that some users could take steps to improve their own understanding of various pools through due diligence.

The FCA will be writing to all users and operators of dark pools who participated in the review with feedback based on its findings and, where necessary, requests to remedy issues. The FCA expects firms to continue to prepare for implementing the changes that will be required by the secondary legislation (which is not yet finalized) prepared under MiFID II, which will have a significant impact on firms, in particular their broker crossing networks, and their existing or proposed business plans.

The thematic review is available at: http://www.fca.org.uk/static/documents/thematic-reviews/tr16-05.pdf.