The Federation of European Securities Exchanges, led by the largest continental bourses, has also long advocated the eradication of dark pools, or at least their curtailment. In fact, this debate long pre-dates the markets in financial instruments directive itself. In 26 years of running equity trading businesses, some global, I have witnessed the deep divide that exists between the continental European retail-driven model – with its emphasis on transparency, immediacy and order-driven technology – and the London wholesale-based concept – driven by research expertise, innovation, institutional distribution and the willingness and ability to commit capital.

That London managed over the years to capture more than 60% of the European financial services market while becoming an undisputed leading global financial centre may have something to do with this. Yet, the two models continue to be presented by some as incompatible and mutually exclusive. Empirical studies have repeatedly shown that markets which cannot accommodate the needs of a significant sub-set of customers suffer as a result of unfilled latent demand and reduced liquidity. Crossing networks, or dark pools as they have become known since Mifid, were created to address just this.

Strong regulation needs to embrace diversity and promote liquidity, not constrain it. We need to find a framework that promotes these principles along with transparency and efficiency, factoring in all market participants, as no market is sustainable in the long term if curtailed by limited flow. You cannot force traders on to an exchange. They will find other ways to execute and then the price formation mechanism falters. The answer isn’t to ban dark pools or unduly restrict them, but to ensure that things like post-trade transparency are improved and standardised throughout Europe. Policymakers should also seek to avoid intervention designed to exclude liquidity from our markets unless they can clearly prove that such changes will reduce transaction costs.

MiFID II is a far-reaching document. It also seeks to address some of the transparency issues that plague the market, in part through a new consolidated reporting system, as recently advocated by MEP Kay Swinburne. We support such a view, though with the caveat that allowing an exchange to run this consolidated tape service at a European level would not be in the best interests of the market. An exchange would have a gross conflict of interest. However, the solution already exists: technology-savvy neutral firms, such as Thomson Reuters, already operate a multiplicity of data centres throughout Europe – they could hit the ground running, quickly, cheaply and efficiently. All that is needed is regulatory agreement for a harmonised set of reporting standards at the European level.

But there is a deeper conflict hiding beneath the dark pool debate. For the past decade since their demutualisation, exchanges have been engaged in a pitched battle with their erstwhile owners, banks and broker-dealers, for control of market infrastructure. The challenge is to reconcile the fairness and transparency benefits of a one-size-fits-all market structure with the innovation, specialisation and cost benefits achievable only through competition among different providers and models. 

Rather than acting as mere lobbyists fighting for their corner, banks, broker-dealers and exchanges should co-operate to present politicians with the market solutions that will fix today’s acute problems: reducing the weight of debt in our economies, helping banks optimise their balance sheets through well-designed clearing products, diversifying sources of finance for the 4.8 million small and medium-sized enterprises in the UK – which are the only solutions we have to solving long-term unemployment in our country – and helping to lower the cost of raising capital for corporations by promoting innovative, efficient and highly liquid capital markets. We believe the time has come for a grand bargain between banks and exchanges. Not good news for lobbyists perhaps, but good news for the rest of us.

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