Dark pools may be dying off (and why that is and what that is a good thing)

I think that because of this recent bit of news: Goldman gives up on Canadian stock market – The Globe and Mail.

Goldman unveiled the market in August of last year, setting it up as a so-called dark pool in which traders could transact anonymously. The idea of dark pools is to enable buyers and sellers to put up orders in secret, which are then matched by computer systems, as opposed to so-called lit markets like the TSX where orders are posted for all to see.

I thought this could just be a Canadian story, but this story (Off-exchange trading: Some like it not | The Economist) indicates that dark pools were in trouble even as Goldman Sachs was entering the Canadian market.

Here’s a chart from the Economist:

You can see not only the number of dark pools levelling off, but the volumes traded too.

Why is that? Well, in the Globe, it mentions “a tough new set of rules recently put out by regulators on dark pools”, and the Economist states “Grumbles by institutional investors give regulators more excuse to get involved.”

It they are dying off or at least levelling off because of regulation, that will be good thing. To me there is too much potential for things to go seriously wrong in such markets. The words “anonymous”, “secret”, “high speed”, “automated” come up often in discussions about dark pools, and those words combined are a recipe for disaster. I don’t expect the banks and traders to have learned any lessions from the last big crash, but I would hope the regulators have. If not, we could all be in for alot more problems.

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