Dark Pool Trading
Introduction
Price formation
Impact on other market users
Possible market abuse
INTRODUCTION
Turning from the venue of block order trades to a high-frequency trading spot of smaller and medium size orders, dark pools are now being questioned for their initial purpose and if their presence is lowering the market quality.
Dark pool trading occurs when the client is submitting an order or a buy without stating his side, nor the size and price of the share. Therefore, he makes an anonymous bit or ask. The pre-trade information opacity leads to easier trading with less liquid stock and moderate prices. In general there are five types of ownership structures of dark pools. (UBB TechWeb, 2011)
• Broker-dealers owned dark pools
• Exchanges owned dark pools
• Consortium owned dark pools
• Independent dark pools
• International dark pools
Overall, dark pool trading volume has been increasing steadily over the past decade. This is supported by technology innovations and changes in regulations stimulation competition. On the other side trading volume on ordinary exchanges had face a decline and reacted by creating their own dark pools and crossing networks. In December 2010 the trading in off-exchange venues reveals the highest-percentage of 13.3 per cent of the total volumes of all US exchanges. European markets have undergone a sharp rise in 2010, up to 4.18%. (See figure 1). Forecasts expect the US volume to reach 15 per cent at the end of this year, 8 per cent for the UK and 6 per cent for whole Europe. http://www.ft.com/cms/s/0/e52cbdc0-2fbd-11e0-91f8-00144feabdc0.html#axzz1F6JXCor9 http://www.marketwatch.com/story/dark-pools-account-for-4-of-europe-trades-study-2009-11-02
Motivation of market users (PWC 2008):
• Non- displayed trading
• Reduce market impact
• Price improvement
• Reduces transaction cost
• High liquidity
PRICE FORMATION
Maureen O´Hara (2003) considered price discovery as one of the main function of the security market.
Price formation
Impact on other market users
Possible market abuse
INTRODUCTION
Turning from the venue of block order trades to a high-frequency trading spot of smaller and medium size orders, dark pools are now being questioned for their initial purpose and if their presence is lowering the market quality.
Dark pool trading occurs when the client is submitting an order or a buy without stating his side, nor the size and price of the share. Therefore, he makes an anonymous bit or ask. The pre-trade information opacity leads to easier trading with less liquid stock and moderate prices. In general there are five types of ownership structures of dark pools. (UBB TechWeb, 2011)
• Broker-dealers owned dark pools
• Exchanges owned dark pools
• Consortium owned dark pools
• Independent dark pools
• International dark pools
Overall, dark pool trading volume has been increasing steadily over the past decade. This is supported by technology innovations and changes in regulations stimulation competition. On the other side trading volume on ordinary exchanges had face a decline and reacted by creating their own dark pools and crossing networks. In December 2010 the trading in off-exchange venues reveals the highest-percentage of 13.3 per cent of the total volumes of all US exchanges. European markets have undergone a sharp rise in 2010, up to 4.18%. (See figure 1). Forecasts expect the US volume to reach 15 per cent at the end of this year, 8 per cent for the UK and 6 per cent for whole Europe. http://www.ft.com/cms/s/0/e52cbdc0-2fbd-11e0-91f8-00144feabdc0.html#axzz1F6JXCor9 http://www.marketwatch.com/story/dark-pools-account-for-4-of-europe-trades-study-2009-11-02
Motivation of market users (PWC 2008):
• Non- displayed trading
• Reduce market impact
• Price improvement
• Reduces transaction cost
• High liquidity
PRICE FORMATION
Maureen O´Hara (2003) considered price discovery as one of the main function of the security market.