Occasional Paper No. 29: Aggregate market quality implications of dark trading

In this paper, we examine the impact of dark trading on aggregate market quality in the UK.

Occasional Paper No. 29 (PDF)

We have published this Occasional Paper alongside an Insight article - Dark trading and market quality

Find out more about Occasional Papers and read our disclaimer.

Summary

Over the last decade, regulatory changes, coupled with technological advancements, led to the proliferation of new classes of trading venues. One of the most prominent new trading venue types is a class of venues known as 'dark pools'. Trades executed on dark pools have no pre-trade transparency. Other market participants apart from the submitter and the pool operator are not aware of orders submitted to a dark pool before their execution.

This study contributes to the dark pools debate by presenting the first evidence on the impact of dark trading on aggregate market quality in Europe. The study is also the most comprehensive examination to date of dark trading in Europe, since we explore dark trading across all the major trading venues in the UK.

We find that, at current levels, dark trading does not appear to be harmful to market quality in the aggregate UK equity market. Our results imply that there is a threshold at which dark trading may start to negatively affect market quality.

Authors

Matteo Aquilina, Ivan Diaz-Rainey, Gbenga Ibikunle and Yuxin Sun. 

Matteo Aquilina works in the Economics Department of the FCA. Ivan Diaz-Rainey is an Associate Professor at the University of Otago. Gbenga Ibikunle is an Associate Professor at the University of Edinburgh. Yuxin Sun is a Research Associate and Doctoral Researcher at the University of Edinburgh’s Business School.

Disclaimer

Occasional Papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views. The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that Occasional Papers contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.