Speed Traders Exploit U.K. Dark Pools, But Not Enough to Matter

  • Dark pool prices out of date about 3.5% of the time: FCA study
  • Cost to investors too minimal to outweigh usefulness, FCA says

High-frequency traders are taking advantage of slower data connections used for U.K. dark pools, but it’s not costing investors enough to outweigh the usefulness of the trading venues, a report published by the Financial Conduct Authority found.

About 3.5 percent of the time, the stock prices used for trading in the dark venues are out of date, dubbed “stale,” according to the report, conducted by academics and FCA economists and released on Thursday. While that gives an advantage to computerized HFTs, obsolete price data only costs traders about 4.2 million pounds ($5.5 million) a year.

“The costs associated with inferior reference prices are small, and do not outweigh the useful service dark pools provide to market users,” the report found. The views were those of the authors and not an official FCA finding.

The study tackled a key investor concern: Are markets fair to those without a technological advantage? Some have cried foul, claiming sophisticated traders get access to lucrative price information through faster data connections. Yet many studies have exonerated HFTs.

Dark pools were originally meant to protect larger orders. To do so, they hide bids and offers. In Europe, a public market like the London Stock Exchange is often used as a reference to determine the prevailing, fair price. For faster traders, a lagging reference price feed can create an opportunity.

Dark pools have been controversial, and some banks have been fined for misleading investors on how they operate them. Still, they’re increasingly popular. Their share of trading in the EU rose to a record in July, according to Rosenblatt Securities Inc. estimates.

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