Analysis of Dark Pool Trading Platforms

1862 WordsMay 28, 20158 Pages
Introduction Over the past years, traditional equity exchanges have decreased due to consolidation in the market. On the other hand, alternative trading systems (ATSs) have merged as a second medium for trading [8]. Today, there are over 40 such ATSs compared to only 11 exchanges [9]. ATSs can be separated into electronic communication networks (ECNs) and dark pools [5]. In line with the increasing number of ATSs, dark pool trading activity has increased substantially. In 2009, the percentage share of total equity volume traded in dark pools in the U.S. amounted to 25% and has since increased to 35% according to the SEC. While dark pools claim to offer many benefits to its participants, a recent surge in fines and penalties from the regulator against operators of dark pools has renewed the debate whether dark pools actually contribute to the overall quality of the market. Players in the dark pool segment In general, dark pools attract a variety of participants. The main advantages dark pools claim is to provide traders with additional liquidity, lower submission and execution fees and due to its nature of not publicly displaying orders, a limited effect on the market when trades are executed [7]. On the flipside, there are various issues to consider relating to market fragmentation, equal access, price formation and manipulation and potentially improper trades that are relevant to the different players [5]. Buy-side Institutional investors such as those represented by the Investment Company Institute in the U.S. heavily depend on well-functioning capital markets as they had more than $13 trillion invested in U.S. equity for a total of 29 percent of publicly traded equity in 2011 [11]. These institutional investors are attracted to trading in dark pools, because of their feature of not disclosing prices until after a trade occurred. Routing orders through

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