RPT-Banks face dark pool battle with Europe’s bourses

(Repeats with addition of contact details at end of story)

* Exchanges pressing for MiFID amendment on ‘dark pools’

* Banks say dark pool trading volumes relatively small

* Banks seek support from institutional clients

By Luke Jeffs

LONDON, Dec 6 (BestGrowthStock) – Top investment banks which offer
their clients ‘dark pool’ share trading platforms are facing an
uphill battle against Europe’s stock exchanges over keeping
these murky trading venues outside the mainstream of market
regulation.

European regulators are set to publish a consultation paper
on Wednesday proposing controversial new rules to restrict the
activities of the banks’ dark pools, which anonymously match
large buy and sell orders, when operated as a broking service
rather than a marketplace. [ID:nLDE6B117U]

Brussels will outline the new restrictions as part of its
long-awaited amendments to the Markets in Financial Instruments
Directive (MiFID), which in 2007 opened up European share
markets to cross-border competition and the advent of
pan-European electronic multilateral trading facilities (MTFs).

“The members of the European Parliament think that MiFID
failed and they expect much more out of MiFID II,” said Andrew
Bowley, a managing director at Nomura (8604.T: ).

The world’s largest investment banks have set up in the past
three years two types of alternative trading venues: proprietary
systems that match up client orders privately, known as dark
pools, and exchange-like MTFs, which are more tightly regulated.

Together they have claimed up to a third of stock market
trading activity in just three years.

NYSE Euronext (NYX.N: ), which trades French, Dutch, Belgian
and Portuguese stocks, has seen its market share drop to 68.3
percent this month from 97.5 percent at the start of 2008.

Meanwhile Deutsche Boerse (DB1Gn.DE: ) now has a German market
share of 68.9 percent compared with 98.5 percent three years ago
while the London Stock Exchange (LSE.L: ) has been hardest hit
with 51.1 percent of UK trading this month compared with 95.8
percent in early 2008, according to Thomson Reuters data.

Europe’s three main exchanges offer their versions of the
banks’ dark pools but the main difference is in how these
services are treated by regulators.

The exchange pools are regulated as quasi-exchange MTFs
while the bank pools are currently treated as a function of the
banks’ broking.

Many large investment banks operate their own internal dark
pool trading systems, including Barclays (BARC.L: ), Credit Suisse
(CSGN.VX: ) (CRP.N: ), Deutsche Bank (DBKGn.DE: ), Goldman Sachs
(GS.N: ), Morgan Stanley (MS.N: ) (Read more about the money market today. ), Nomura and UBS (UBSN.VX: ).

Dark pools are popular among fund managers because they
enable the sale or purchase of large, market sensitive volumes
away from the public glare of a stock exchange order book.

But the exchanges have questioned whether it is fair that
this business is being conducted by the banks privately on what
they say are thinly regulated systems, while they are subject to
tougher rules themselves when offering what they say is an
identical service.

REGULATORY CHANGES

The European Commission will propose next week that the dark
pools are regulated as MTFs if they exceed a certain size
threshold, making the rules much stricter.

The Federation of European Securities Exchanges — which has
been lobbying hard for the amendment, saying that it will enable
its exchange members and brokers to compete more equally.

The pending EC proposal also follows a report by European
Parliament member Kay Swinburne, who late last month called for
tougher restrictions on bank pools.

“We take heart from the Swinburne Report’s assertion that if
you’ve set up a multi-lateral trading pool the business should
be approved as a regulated market or multi-lateral trading
facility,” said FESE deputy secretary general Burcak Inel.

BANKS BRISTLE

The banks say the exchanges have exaggerated the size of
dark pools in claiming that as much as 40 percent of European
trading takes place away from exchanges, when the real number is
much less than 5 percent on a monthly basis.

“The majority of the 40 percent is reported flow not real
liquidity so it does not follow that this needs to be made
transparent,” said Bowley.

“My concern is that some firms might be looking to use
regulation as their means to reduce competition,” said Alasdair
Haynes, who heads MTF and dark pool operator Chi-X Europe, which
is owned by investment banks.

In seeking to win over the support of European regulators
the banks say they plan to call on their asset management
customers to explain how dark pools enable those firms to trade
more cost-effectively, which ultimately means a better deal for
pension fund holders according to the banks.
(Editing by Greg Mahlich)

RPT-Banks face dark pool battle with Europe’s bourses