Drowning in a dark pool of fees

As Alex Frino reported, regulators are starting to shine the light on the “dark pools” spreading from the United States to Australia, due to concerns about their impact on our financial markets.

Dark orders are orders to buy or sell shares that are not submitted to so-called “lit” markets, which in Australia are the markets run by the Australian Securities Exchange and Chi-X.

Dark orders trade in venues set up by brokers or specialist firms and are known as “dark pools”. They are invisible and non-transparent, and by definition deprive Australian “lit” markets from competitive buying and selling pressure because a portion of buyers and sellers trade elsewhere.

They also deprive the lit market of information that would normally be used to determine the market clearing price. As a consequence, dark orders increase the cost of trading shares, and decrease the likelihood that prices fairly reflect prevailing market conditions.

Why then do regulators such as the Australian Securities and Investments Commission and the US Securities and Exchange Commission allow them to proliferate? The rationale for their existence in the US is absolutely clear. So-called lit exchanges in the US – the New York Stock Exchange (NYSE) and Nasdaq – operate very peculiar market structures.

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