Occasional Paper No. 60: Banning Dark Pools: Venue Selection and Investor Trading Costs

This paper shows that investors can reduce their execution costs by selecting venues with less pre-trade transparency, such as dark pools or venues with similar characteristics.

Occasional Paper No.60 (PDF)

Summary 

In this paper, we use a proprietary transaction-level dataset from the UK's equity market, to analyse the impact on transaction costs of venue choice and a recent ban on dark pool trading (the ‘Double Volume Cap (DVC)’).

We show that:

  • trading on venues with lower levels of pre-trade transparency is associated with lower transaction costs (measured as lower implementation shortfall)
  • reductions in transaction costs also occur from trading in alternative venues, such as ‘periodic auctions’, when ‘dark’ trading is banned
  • neither a recent ban on dark pool trading, nor its suspension, significantly affected the transaction costs of investors in the UK equity market

Authors

Christian Neumeier, Arie Gozluklu, Peter Hoffmann, Peter O’Neill, Felix Suntheim

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.