ECB trading rules spark warning over dark pools

New regulations designed to make trading more transparent may have the opposite effect by encouraging the emergence of so-called dark pools in fixed-income markets, the European Central Bank said.

In a report on financial stability, the ECB called for more study of the development and potential effects of dark pools and for closer monitoring of the evolution of fixed-income markets.

“Bonds are more heterogeneous than equities and traded less frequently but in larger trade sizes,” the report said. “Thus fixed-income traders may prefer dark pools to avoid revealing intent and trading with more informed counterparties.”

Asset managers in recent years have turned to electronic platforms to buy and sell large blocks of bonds anonymously. That is partly because banks have pulled back from the business of wholesaling debt amid rising regulatory costs. Credit Suisse Group shook Europe’s bond markets last month with the decision to drop its role as a primary dealer for government bonds.

Opaque trading venues for European stocks surged after the European Union overhauled its rules in 2007 to break the exchanges’ monopoly over share trading. The EU is now expanding the rules, part of a broader regulatory package known as MiFID II, to include fixed-income trading and rein in the use of dark pools for equities trading.

MORE REPORT: European fund managers urge tighter regulations in ‘dark pools’

Dark pools serve investors wishing to avoid the market impact costs of big-ticket trades. As the price and volume are not disclosed before the trade, investors can place an order without showing their hand to traders. Europe is imposing limits on such venues for stocks out of concern that they are making prices on public exchanges less accurate and fragmentation could make markets less liquid.