3 what are dark pools what functions do they serve

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3. What are dark pools? What functions do they serve? How were these functions performed by the NYSE when it was a monopoly? If you were running a dark pool would you open it to HFTs? Dark pools are private stock markets inside Wall Street banks that were created to let big investors trade large blocks of shares in secret - orders aren’t made public, no bid-asked prices are posted, only completed trades are posted. They are alternative trading systems to the public markets. They can charge smaller fees because they are a unit of a larger firm. They originated to allow large volumes of trade to occur without affecting market prices and making the large-volume traders pay more. They allowed the identity and intention of a seller to remain private. A market specialized for large buyers and sellers has a better chance of matching interests completely, and can allow better prices by taking the midpoint of the bid-asked spread. The NYSE as a monopoly could hide the identity and intentions because it wasn’t required to publish information. Further, its size meant the larger trades had less of an impact on the market, especially since they weren’t exposed immediately. I wouldn’t permit HFTs into a dark pool because they could reveal the intentions and identity of traders to the larger market and thus defeat the purpose. The lack of transparency would make it easier for HFTs to engage in predatory and manipulative trading practices. 4. What effect would you expect fragmentation to have on market quality? What would you expect to happen as a result? Why hasn’t it happened? Are there any benefits to fragmentation? I would expect fragmentation to decrease market quality because liquidity and price discovery are better in larger, centralized markets. However, the increased competition would lower transactions costs, which could be important if market power was being abused. Fragmentation should lead to centralization to combine order flow and improve the quality of the market, but regulation changes and technology have decreased the advantages of centralized markets. Fragmentation increases competition, so that’s good.
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