Dark Pools: In the Eye of the Storm

by Arin Ray,  David Easthope, November 20, 2013
Industry Trends


Growing trading volumes on dark pools in the US and Europe during the last couple of years have raised a debate on their implications on market structure, market quality, and trading costs. If the trend continues and more trading moves to the dark in the next few years, it would raise great concern over the future of lit markets.

In the report Dark Pools: In the Eye of the Storm, Celent examines the evolution of dark pool trading in the US and Europe and analyzes some of the current issues raised by dark pools such as market abuse, price formation, and equal access, that are important from a regulatory point of view.

The emergence of dark pools is a result of the ongoing evolution of market structure. However, the changes in market structure over the last five years has also resulted in greater complexity, thereby making it difficult to isolate and evaluate the contribution of developments such as increased dark pool trading to the overall stability and efficiency of the capital markets. Nevertheless, incidents of market abuse that have taken place in the recent past have put dark pool trading under greater regulatory scrutiny. In addition, reducing average trade sizes at dark pools is adding greater pressure on regulators to review whether dark pools are carrying out the functions they were intended to carry out. The average execution size at dark pools in the US has fallen from 430 shares in 2009 to around 200 shares in June 2013.

“Dark pools are an important component of market structure,” says Arin Ray, Analyst with Celent’s Securities and Investments Group and author of the report. “It is important to understand that forcing volumes away from dark pools to lit exchanges may not necessarily result in reduced trading costs and improved market quality.”

“All dark pools are not equal,” says David Easthope, Research Director with Celent’s Securities & Investments Group and coauthor of the report. “A bid to control excessive trading at dark pools could adversely impact investors trading large blocks at specialized venues.”

This report begins with an analysis of the key factors that have led to the growth of dark trading in recent years. The report looks at the evolution of dark trading in the US and Europe and focuses on some of the key statistics relating to the debate of lit vs. dark trading. Then, the report presents an analysis about the future of dark pools, especially relating to the ongoing regulatory debate.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Executive Summary




Overview of Dark Pools



Key Drivers of Dark Pool Activity


Evolution of Dark Pools



Dark Trading in the US



Dark Trading in Europe


Regulatory Debate



Market Abuse



Price Formation



Equal Access



Regulatory Developments


Looking Ahead



Regulating Broker-Dealer Crossing Networks



Anticipating Broader Regulatory Framework






Leveraging Celent’s Expertise



Support for Financial Institutions



Support for Vendors


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