Finance: Off-exchange Trading Venues

Lord Peston Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Sassoon]

My Lords, we should distinguish—as I am sure my noble friend Lady Kramer does—between the two issues of dark pools and high-frequency trading, both of which I am sure noble Lords are very familiar with. Dark pools are akin to what used to be called “upstairs trading”—off the floor of the Stock Exchange. We need to make sure that the benefits of being able to trade in such an environment, such as competition and choice for investors, do not impinge in any way on the transparency and the price-discovery ability of markets. The FSA has done work on that and is content that the price-discovery mechanism is not being damaged.

High-frequency trading is a very new and slightly separate area, although I agree that it is related, and it is one on which the Government are doing considerable work. A research project led by the Government Office for Science is looking at the possible evolution of computer-generated trading and its implications, and will produce up to 20 papers on the subject during 2011.

[Lord Peston]

Are dark pools the same as dark matter, which the astrophysicists tell us permeates the universe but which no one can observe? Is not the problem that for a considerable period banks and other financial institutions marketed paper assets that had no real assets behind them, and that that is what led to the financial crisis? Is it not more worrying that the banks cannot wait to get up to the same tricks again, and will do so if something is not done to regulate them properly?

[Lord Sassoon]

My Lords, I am no great expert on dark matter and black holes, but I think the distinguishing point about dark pools is that they are a venue for trading that enables confidential orders to be submitted and matched using a reference point that comes from a transparent market. As soon as the trade is done, the details are reported publicly. Therefore, there is confidential trading and then full reporting, which is the critical feature of the market. Various platforms are available for the market, which accounts for something of the order of 7 per cent of UK and European equity trading. It is not a dominant part of the market by any means, but it is one that we are watching.