The Sydney-based Capital Markets Cooperative Research Centre (CMCRC) in its latest report says that the rise of dark trading in the US is costing local investors billions of dollars and has damaged the overall market.
CMCRC compiled a study which looks at the US market and examines the effects of approximately 300 venues, including 13 registered exchanges, approximately 40 alternative trading systems (ATSs) and a number of broker-dealers’ platforms.
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Authors Frank Hatheway, Hui Zheng and Amy Kwan argue that the ability of dark pools to offer sub-penny tick sizes – and place different restrictions on pre-trade transparency and access than conventional lit markets – allow them to actively entice orders unrelated to the short-term directions of future price movements, resulting in higher transaction costs across all venues, and lower price efficiency overall.
The study says that with the exception of block trading, not only do dark pools fail to bring positive benefits, nor even have a neutral impact, they have a negative effect through higher transaction costs and lower price discovery.
The group proposed three policy recommendations, including modifications to fair access rules, harmonisation of tick sizing, and action by regulators to demand that participants demonstrate meaningful price improvement as a result of their dark executions, and prioritisation of lit orders.
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