Dark pools in European equity markets: Emergence, competition and implications

This paper considers the growth of dark pools: trading venues for equities without pre-trade transparency. It first documents the emergence and expansion of dark pools in European equity markets in the context of regulatory changes and increased high-frequency trading (HFT). It finds that the market share of trading conducted in dark pools has stabilised below 10% and is similar across groups of stocks from different countries. Second, this paper assesses the nature of competition between dark pools, which is based on price and services offered to clients. It documents a substantial degree of horizontal differentiation among European dark pools, with venues providing different options for placing and processing orders likely to attract different types of traders. The hypothesis that most dark pools are primarily used to shield large orders from information leakage is not supported by evidence. This finding is based on a simple indicator that assesses different dark pools in terms of the level of protection from information leakage due to trading with HFT or predatory traders. Finally, this paper evaluates the benefits and costs of the use of dark pools from the perspective of individual traders as well as for market efficiency and financial stability. Recent evidence appears to reject the notion that dark pools adversely affect volatility in stock markets.