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Enhancing Our Equity Market Structure - Speech from US Securities and Exchange Commission chair Mary Jo White

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The Australian Securities and Investments Commission (ASIC) is Australia's corporate, markets and financial services regulator. An independent government body, its priorities are to ensure confident and informed investors and financial consumers, fair and efficient financial markets, and efficient registration and licensing.

Dark trading is trading that occurs without pre-trade transparency. Although dark trading has always been a feature of equity markets, in recent years markets around the world have exhibited substantial growth in the level of dark trading and a change in the manner in which dark trading takes place. New trading venues, known as dark pools, have emerged. These venues systematically match orders without providing any pre-trade transparency and without providing access to this liquidity to the market at large. Dark pools are also typically subject to less regulatory scrutiny than traditional stock exchanges.

The first WFE events in the Year of Snake appropriately took place in the Asia / Pacific region with visits to exchanges interested in joining the Federation, as well as a meeting open to all members as the Working Committee reviewed priorities for 2013.

 

Liquidity refers to the speed and cost of buying and selling (ie. liquidating) securities in the market. A liquid market is one in which a security can be bought or sold quickly and at a low transaction cost. There are at least 2 theories which predict the impact of the operation of competing execution venues such as dark pools on market liquidity. Interestingly, they provide conflicting predictions. On the one hand, there is the so-called “competition” hypothesis which implies that dark pools have a competitive effect on liquidity providers in lit markets. The hypothesis implies that dark pools provide competition for lit markets and put pressure on liquidity providers such as dealers to reduce their bid-ask spreads in order to attract order flow. In reducing bid-ask spreads they reduce the cost of trading and therefore increase liquidity. Competing with this view is the “fragmentation” hypothesis which implies that dark pools merely fragment liquidity in the lit market. The fragmentation view implies that because order flow is split across more than one trading venue, that the amount of trading in the lit market declines. This in turn implies that the amount of time that a limit order or quote is ‘alive’ in the lit market increases and the associated increase in the holding cost or risk faced by a limit order or quote provider increases. In order to obtain economic compensation for this increase in cost, the limit order or quote provider increases their bid ask spread. Hence the cost of trading increases, and the market is less liquid.

The following article is an edited excerpt from the year-in-review issues of Rosenblatt Securities’ Let There Be Light reports on dark-pool volumes and trends. Rosenblatt publishes a US and European edition of LTBL each month for its clients. The reports marry often hard-to-obtain volume data for dark pools in both regions with analysis of what is driving activity in these venues.

Focus

Wednesday, February 27, 2013

 

research recently completed by Carole Comerton-Forde of the University of Melbourne and Talis Putnins from the UTS Business School on dark trading in Australia.

WFE 52nd Annual Meeting
Friday, September 28, 2012

The World Exchanges unite for the 52nd General Assembly and Annual Meeting

 

Friday, July 27, 2012

WFE reviews the half year market statistics, in addition, Duncan Niederauer, CEO of NYSE Euronext and Alex Frino, CEO of CMCRC shares their views on dark pools.