Financial Conduct Authority orders banks to shine light on dark pool stock exchanges and clean up operations

Barclays and Credit Suisse paid huge fines in the US to settle misconduct allegations over the operation of their dark pool share trading exchanges. The City watchdog says the UK market is different, but it still wants banks to do better

FCA boss Andrew Bailey has told banks to shine light on their dark pools (PA)

The City watchdog has ordered banks operating so called “dark pool” stock exchanges to come clean on how they work and on who uses them.

The Financial Conduct Authority made the demand alongside the publication of a “thematic review” into the controversial sector. Disciplinary action can follow if operators fail to heed its call to improve practices.

Dark pools allow big institutional investors such as pension funds to trade huge blocks of shares anonymously by matching buyers with sellers

They became popular because they allow big trades to be executed without the market “moving against” investors as often happens with conventional stock exchange when they try to either buy or sell large amounts of shares in single companies.

The sector started to attract attention when it emerged that dark pools were being accessed by so called “high frequency traders” whose activities shot to prominence after they were highlighted in Michael Lewis’s bestselling book Flash Boys.

Barclays and Credit Suisse were in February fined a total of $154m (£117m) in the US over the operation of their “dark pools” in that country. Barclays paid $70m.

Andrew Bailey, chief executive of the Financial Conduct Authority, said the watchdog’s review “aims to address concerns about the operation of dark pools in the UK”.

“It is vital that we have clean, effective and competitive wholesale financial markets,” he said.

The watchdog has told operators - often big investment banks - that they must provide “clear detail about the design and operation of a dark pool to users”.

They have also been told to “improve the monitoring of activity in their pools with a focus on operational integrity, best execution, client preferences and unwanted trading activity including market abuse”.

The FCA wants them to do more to identify and manage conflict of interest, improve oversight, and ensure their operations are regulatory subjected to independent assessments.

The review looked at promotions undertaken by dark pool operators, the quality of the identification, management and disclosure of conflicts of interest as well as governance, oversight and controls.

The watchdog, however, said there were “significant differences” between the way pools operate in the UK when compared with the US. Its review only considered the UK market, the venue for most dark pools that operate in Europe.