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Dark Pools - Case Study Example

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They are known to be trading in a dark pool. Thus, the concept of Dark Pool was introduced much back in 1980. This was initiated when many few of the institutional investors and traders got involved in trade in a secure place, away from the interfering eyes of the brokers or public exchanges. Their main aim was to sell or buy large amount of the stocks without being affected by the market fluctuations and achieve a better price than that provided by the public exchanges (“Definition of Dark Pools”). It was noticed that around 2005, the dark pools was successful in capturing 3-5% of the total market activity. After that, the situation had started to improve when the Security and Exchange Commission (SEC) passed a new regulation, called the Reg NMS (Regulation National Market System). In this regulation, there were provisions which had increased the level of competition among the exchanges. However, it got rid of the rules that confined manual quotations which are generated by the stock exchanges. It allowed the investors the option to avoid the exchanges, if they are unsatisfied with the price and receives better price and convenience elsewhere. Dark Pools The dark pools can be defined as the name that is given to the networks which enables the traders to sell or buy huge orders without bearing the risk of other traders and their price of selling the orders. Thus, they are criticized for the lack of transparency that the later possesses. The unavoidable fragmentation of trading can lead to less competent pricing in the conventional open stock exchanges. In the dark pools, the pre-trade prices of the shares that are open for sale are not detectable to the public. The participants are also not aware of the prices at which the shares are traded. The prices are revealed only when the trade is done (“What the Heck is a Dark Pool and Why are People Trading in Them?”). The Reg NMS gave an opportunity to the brokers and the dealers to start their own automated trading, thereby creating dark pools. The institutional investors and the banks which generate huge money, started to head towards these dark pools in order to save their trading costs. The recent statistics indentify that there has been 12% trading in the dark pool accounts in United States (“What are dark pools?”). The main benefit of trading in dark pool can be recognized as the price improvement. The benefit can be explained through an example. Suppose the bid price of a stock on an exchange is $10.00 and the asking price is $10.10. The dark pool will set the price at $10.05 which is in the midpoint of ask and bid price. The investors like the activity of the dark pool and thus, prefer to invest there. The equity markets in United States and worldwide are prospering at an increasing rate. The participants work on a certain model which allows the people, interested to trade display the sell or buy price and ask or bid price. In the exchanges, the displayed prices by the brokers are seen in the Tier II quotes (“What the Heck is a Dark Pool and Why are People Trading in Them?”). The opposite of the displayed prices are the dark pools. It refers to the place where the trading liquidity ...Show more
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Summary

Dark Pools Table of Contents Introduction 3 Dark Pools 4 Main aim of Dark Pool 5 Trading in Dark Pools 6 Effect of Dark Pool on Price Discovery 7 Improvement in price discovery by the dark pool 9 Dark Pool – Bad or Good 9 Name of Student: Name of Professor: Course Number: Date of Paper: Dark Pools Introduction The overall picture of the financial market has encountered much turmoil which has forced the traders or the investors to land in a depressing position, thereby losing their money…
Dark Pools
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