Financial Markets Analysis: A Critical Analysis of Dark Pools

Abstract

Dark pools have received a lot of attention from academics and the public alike. This paper explores the arguments for and against the expanding utilisation of dark pools of liquidity, henceforth simply referred to as “dark pools”. Over the recent past, several traditional equity exchanges have experienced a loss in trading volume, whilst a wide variety of dark pools have grown globally to unprecedented sizes. The escalation in the size of these dark pools have raised concerns over their impact on financial stability, which has prompted authorities to consider regulating dark pools in order to negate the risks they pose. Due to the increased level of high-frequency trading in dark pools, adverse selection is much more prevalent, and this presents negative effects to the buy-side participants. However, dark pools have positive elements. This paper analyses both the positive and negative elements of dark pools.