Dark pools or anonymous share trading platforms, must improve how they handle conflicts of interest, Britain's markets watchdog said today.
The watchdog made the comments in a keenly-awaited review that stopped short of proposing any major shake-up.
Dark pools are trading venues that differ from "lit" or public exchanges because share orders are not visible to other traders until they are executed.
They have attracted increasing scrutiny in recent years, amid claims by exchanges, regulators and lobby groups, that they distort market pricing and disadvantage traditional investors.
The lack of pre-trade transparency is designed to help institutional investors, like pension funds and asset managers, to trade large blocks of shares without the market moving against them.
The UK's Financial Conduct Authority's sector review looked at how dark pools promote themselves and manage conflicts of interest.
It found that firms operating dark pools have made significant progress in addressing the promotion and the management of conflicts of interest, but some improvements were needed.
"Pre-trade price transparency was not viewed as a significant concern so long as dark pools, which rely directly on prices occurring in the lit markets, remain relatively small versus those lit markets," the FCA said.
Dark pools came under the spotlight in January when Barclays and Credit Suisse settled US federal and state charges that they misled investors in their dark pools, with Barclays admitting it broke the law and agreeing to pay $70m.
In those cases, the two banks faced allegations they misled investors by saying they would protect investors from predatory high-frequency trading practices.
"The FCA review focussed solely on the UK market which has some key differences from other markets or regions. In particular the UK and US vary significantly, especially as to best execution, and behaviours seen in other markets have not been evident in the FCA's review," the FCA said.
The European Union has reformed its securities rules and from January 2018 curbs on the volume of dark pool trading in any particular stock will be introduced.
Britain, however, is leaving the EU and the FCA said today that its review only looked at UK-based dark pools.
