Across the globe, stock trading is a growing industry – but how many investors are earning their profits in dark pools? This research explores the underbelly of investment that has emerged in response to policy changes aiming to increase transparency in the industry. Have these efforts to make the industry more equitable succeeded, or had the opposite effect?
The challenge
Stock trading can occur in a variety of venues - from traditional exchanges to dark pools. Due to their lack of pre-trade transparency, dark pools have seen a rise in popularity amongst investors who don’t want to reveal their trading strategies and have raised concerns among regulatory authorities; leading to the introduction of restrictions to dark trading. These restrictions aim to avoid the impairment of price discovery and bring equity trading back to the public-lit markets. The most restrictive of these regulations was introduced in the European Union when the Markets in Financial Instruments Directive II (MiFID II) imposed a double volume cap on dark trading – unless the orders were Large-in-Scale (LIS).
Solution
To explore the response to the MiFID II, the Swedish Transaction Reporting System (TRS) dataset has been selected. Due to its level of detail, the research team will be able to identify investors’ trading strategies and examine whether there has been a shift in strategies with brokers stitching several client orders to qualify for the LIS waiver and execute in the dark. The second aim of the data analysis will be to evaluate the MiFID II impact on market quality and trading costs.
Outcome and impact
Answers to these research questions will add value for regulators, trading venues and investors deciding to participate in the market. Through the production of a journal article and dissemination via conferences, the end result of this study is to provide guidance to policymakers on whether restricting dark trading does indeed bring improvements in the quality of equity markets.
Ensure sustainable consumption and production patterns
