The following paper will introduce dark pools and present as well as discuss some of the most important arguments in favour of prohibiting dark pools.
Dark pools have been in existence since the 1980s with the first one being founded by Instinet in 1986. However, according to Zhu (2014), there was little interest in dark pools as they only had a very low market share. The author states that this changed in 2007 when both the United States of America as well as the European Union implemented new legislation – the Regulation National Market System (Reg NMS) and the Markets in Financial Instruments Directive (MiFID) respectively – which led to a significant increase in the number of both dark pools and trades on these platforms.
The International Organization of Securities Commissions (IOSCO) (2010) generally defines dark pools as electronic liquidity pools which do not publicly provide any share prices before the trade. This lack of pre-trade transparency thus enables equity investors to trade privately, contrary to public stock exchanges, often referred to as lit markets. According to Lovén (2013), the main purpose of dark pools is twofold, firstly to minimise market impact and secondly to offer improvements of trading prices. To achieve this, dark pools usually execute orders at the midpoint of the bid-offer spread with the latter being sourced from lit exchange prices.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Discussion
- Price Discovery and Public Market Liquidity
- Potential for Abuse
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper delves into the concept of dark pools, presenting and discussing key arguments in favor of prohibiting them. It analyzes the historical context of their emergence and their impact on financial markets.
- The impact of dark pools on price discovery and public market liquidity
- The potential for abuse and predatory trading tactics within dark pools
- The role of high-frequency traders (HFTs) in exploiting dark pools
- The implications of transparency and information asymmetry in dark pool trading
- The comparison of dark pools to traditional public exchanges (lit markets)
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: The paper introduces dark pools, their historical context, and the significance of their emergence in recent years, particularly in the context of new regulations such as Reg NMS and MiFID.
- Discussion: This chapter explores the main arguments against dark pools, focusing on their negative impact on price discovery and public market liquidity. It examines how the lack of transparency in dark pools can lead to market manipulation and predatory trading practices. The role of high-frequency traders (HFTs) in exploiting dark pools is highlighted, further emphasizing the potential for abuse within these platforms.
Schlüsselwörter (Keywords)
This paper examines the complex issues surrounding dark pools, focusing on their impact on price discovery, market liquidity, and the potential for abuse. Key terms include dark pools, price discovery, market liquidity, transparency, high-frequency traders (HFTs), predatory trading, Reg NMS, MiFID, and lit markets.
- Quote paper
- Sabrina Schleimer (Author), 2017, Why should Dark Pools be prohibited?, Munich, GRIN Verlag, https://www.grin.com/document/437649
