Occasional Paper No. 21: Asymmetries in Dark Pool Reference Prices

This study looks at two important aspects of reference prices in dark pools - the prevalence of reference price latency and primary market choice as the reference price's source. For both aspects we then measure the effect for different classes of market participants to analyse the role of participant speed and sophistication in driving outcomes in today's markets.

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In this study, we analyse two important aspects of reference prices in dark pools. First, we examine the prevalence of trades at stale reference prices, their costs and their impact on different market participants. Second, we investigate questions concerning the choice of reference price: to what extent are participants implementing best execution practices when a dark pool references a worse price than the lit market? Is this influenced by conflicts of interest within dark pools and participant sophistication?

Overall, we find asymmetric outcomes across participants when the reference price is stale, and when it is inferior to other prices available. This may result from participants’ differing abilities to observe and manage latency, and differing abilities to engage in effective smart order routing in a fragmented market. These costs are more substantially borne by participant types that are less capable of managing them.

However, it is likely that these outcomes are the result of individual participant decisions on the basis of their own analysis of costs and benefits of investment in reduction in latency. In addition, while the effects are highly statistically significant across participant types, the economic impacts are small.

Dark pools thus may still offer a valuable service to market participants, as in most cases they provide price improvement and in all cases allow investors not to show their hand to the market.


Matteo Aquilina, Sean Foley, Peter O’Neill and Thomas Ruf.

Matteo Aquilina and Peter O’Neill work in the Chief Economist’s Department of the Financial Conduct Authority.

Sean Foley is an Assistant Professor at the University of Sydney and Thomas Ruf is an Assistant Professor at the University of New South Wales.


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