preview

Prior to the creation of dark pools, funds utilized two methods to execute large orders in order to

Decent Essays
Open Document

Prior to the creation of dark pools, funds utilized two methods to execute large orders in order to minimize market impact and information leakage. The first method was to split up larger orders into multiple smaller orders which are then executed on the public exchange. The second method was to utilize a broker specializing in block trading who would then look for a counterparty willing to fulfill that offer (12). Despite measures to prevent market impact and information leakage, traders managed to take advantage of these methods by capturing information from the split trades and information leaked by brokers. Dark pools operate without pre-trade transparency, which means that prices and the parties pertaining to the trade are not …show more content…

The avoidance of public exchanges also means that clients do not have to pay exchange fees (3). Savings on fees are split between the operator and the client creating price improvement for the client while at the same time improving revenue for the operator, providing mutual benefits to both the buy-side and sell-side players (2). In addition to the price improvement benefits, dark pools have also been touted to improve the level of service in the market by introducing competition to traditional exchanges (10). This can be interpreted as a good sign by the government and regulators as increased competition translates into more benefits for the consumers and a more dynamic marketplace. An implication of this is that dark pools have forced stock exchanges to introduce more technological innovations and operating their own dark pools to compete, providing more choice to the consumers (5). Contrary to common perception that dark pools harm price discovery, Haoxiang Zhu, a financial Economist at MIT Sloan School of Management mentions that dark pools actually aid the process of price discovery (9). According to (9), Zhu’s paper shows that dark pools attract less informed traders who force better informed traders whom may not be able to fill their orders back to public exchanges, resulting in a higher concentration of informed traders contributing to the price discovery process. This promotes market

Get Access
Related
Get Access