- October 18, 2019 at 2:02 pm #549917SaimonParticipant
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- Replies: 55
Can you please answer the following question in easy term so that i can understand
1) What is dark pool trading?
2) Main reason for dark pool trading?
3) Problems with dark pool trading?October 19, 2019 at 9:47 am #550152John MoffatKeymaster
- Topics: 56
- Replies: 53569
Dark pool trading is where shares are bought and sold without the dealing being on a normal stock exchange.
This has only been mentioned twice in the exam (both times for 5 marks), and what follows is the examiners own explanation and is well-written:
Dark pool trading systems allow share orders to be placed and matched without the traders’ interests being declared publicly on the normal stock exchange. Therefore the price of these trades is determined anonymously and the trade is only declared publicly after it has been agreed. Large volume trades which use dark pool trading systems prevent signals reaching the markets in order to minimise large fluctuations in the share price or the markets moving against them.
The main argument put forward in support of dark pool trading systems is that by preventing large movements in the share price due to volume sales, the markets’ artificial price volatility would be reduced and the markets maintain their efficiency. The contrary arguments suggest that in fact market efficiency is reduced by dark pool trading systems because such trades do not contribute to the price changes. Furthermore, because most of the individuals who use the markets to trade equity shares are not aware of the trade, transparency is reduced. This, in turn, reduces the liquidity in the markets and therefore may compromise their efficiency. The ultimate danger is that the lack of transparency and liquidity may result in an uncontrolled spread of risks similar to what led to the recent global financial crisis.
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