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Should Dark Pools be Banned from Regulated Exchanges?

Author

Listed:
  • Nathalie Oriol

    (University of Nice Sophia Antipolis, France
    GREDEG CNRS)

  • Alexandra Rufini

    (University of Nice Sophia Antipolis, France
    GREDEG CNRS)

  • Dominique Torre

    (University of Nice Sophia Antipolis, France
    GREDEG CNRS)

Abstract

European financial markets experiment a strong competition between historical players and new trading platforms, including the controversial dark pools. Our theoretical setting analyzes the interaction between heterogeneous investors and trading services providers in presence of market externalities. We compare different forms of organization of the market, each in presence of an off-exchange and an incumbent facing a two-sided activity (issuers and investors): a consolidated exchange with the incumbent only, and fragmented exchanges with several platforms, including lit and dark pools, in competition for order ows. By capturing investors from off-exchange, dark trading may enhance market externalities and market stakeholders' welfare.

Suggested Citation

  • Nathalie Oriol & Alexandra Rufini & Dominique Torre, 2015. "Should Dark Pools be Banned from Regulated Exchanges?," GREDEG Working Papers 2015-21, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2015-21
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    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2015-21.pdf
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/7685 is not listed on IDEAS
    2. repec:prs:recofi:ecofi_0987-3368_2011_num_104_4_5908 is not listed on IDEAS
    3. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, vol. 42(2), pages 277-310, February.
    4. Hans Degryse & Frank de Jong & Vincent van Kervel, 2015. "The Impact of Dark Trading and Visible Fragmentation on Market Quality," Review of Finance, European Finance Association, vol. 19(4), pages 1587-1622.
    5. Nathalie Oriol, 2011. "Investissement institutionnel et révision de la directive MIF," Revue d'Économie Financière, Programme National Persée, vol. 104(4), pages 217-235.
    6. Jean-Edouard Colliard & Thierry Foucault, 2012. "Trading Fees and Efficiency in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3389-3421.
    7. Bessembinder, Hendrik & Panayides, Marios & Venkataraman, Kumar, 2009. "Hidden liquidity: An analysis of order exposure strategies in electronic stock markets," Journal of Financial Economics, Elsevier, vol. 94(3), pages 361-383, December.
    8. Domowitz, Ian, 1995. "Electronic derivatives exchanges: Implicit mergers, network externalities, and standardization," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 163-175.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    microstructure; dark pools; Over-The-Counter market; liquidity; market externalities; two-sided markets;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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