Shedding light on dark markets

October 16, 2017, University of Melbourne
Shedding light on dark markets
The findings challenge the belief that private exchanges can lead to a lack of transparency in markets. Credit: University of Melbourne

Trading of shares and other financial instruments on decentralised or "dark" markets has no effect on the transparency of price information or the way in which those prices are determined, according to new research by the University of Melbourne.

These findings by Professor Peter Bossaerts from the University's Faculty of Business and Economics and Professor Elena Asparouhova from the University of Utah have been published in this month's issue of the Economic Journal.

Professor Bossaerts said the findings challenge the belief that private exchanges can lead to a lack of transparency in markets.

"Dark markers have become part of the landscape of advanced financial markets around the world, including in Australia, and regulators have been struggling with how to regulate them in an informed way," he said.

Professors Bossaerts and Asparouhova conducted groundbreaking controlled experiments to test whether trading in dark markets - which have come under intense scrutiny since the Global Financial Crisis - obscured public .

This involved using the "Flex-E-Markets"' online trading platform, which the researchers developed. Participants or "investors" in the experiment were given securities to trade in both private and public markets. Each was given a private signal - an informed guess that they alone could see - of the final values of the securities.

"We found that the average transaction price in both types of markets, centralised and decentralised, correctly aggregated the private signals," Professor Bossaerts said.

"Transactions did not necessarily take place at the correct price, but stayed within narrow bounds of the correct price, implying that everyone was trading fairly."

The research is timely as it comes ahead of European reforms to be introduced in January that are designed to significantly restrict in dark markets, reforms drafted because the Europeans believe such markets cannot generate fair pricing.

"This is relevant for Australia as well, not only because Australian financial services companies participate in financial markets in the EU, but also because EU (and US) regulations are often a benchmark for new rules here," Professor Bossaerts said.

"Without controlled experimentation, the conclusions of financial regulators like the European Securities and Markets Authority are mere conjecture."

Explore further: Elevated testosterone causes bull market trading

Related Stories

Elevated testosterone causes bull market trading

August 16, 2017

Since the first stock market in Amsterdam in the 17th century, trading floors have been dominated by men. It turns out testosterone may be responsible for some of the dramatic bubbles and crashes we have seen since.

How 'dark pools' can help public stock markets

February 3, 2014

A "dark pool" may sound like a mysterious water source or an untapped oil well. In reality, it's a finance term: Dark pools are privately run stock markets that do not show participants' orders to the public before trades ...

Information leaks help US traders turn a fat profit

May 10, 2016

Research into trading in US stock and bond markets suggests that some traders might be making a significant profit from information leaks.The study indicates that accessing private information about macroeconomic fundamentals ...

Insurer market power lowers providers' prices

September 21, 2017

(HealthDay)—Insurers have the bargaining power to reduce provider prices in highly concentrated provider markets, according to a report published in the September issue of Health Affairs.

US imposes new rules on high-speed traders

July 26, 2011

US regulators on Tuesday announced new rules aimed at shedding light on the secretive industry of computerized high-speed trading, which has been blamed for destabilizing financial markets.

Insider trading study shows stronger enforcement

October 23, 2014

The first major study of the enforcement of Australia's insider trading laws has shown the number of insider trading cases brought by the Australian Securities and Investment Commission (ASIC) is increasing, and the regulator ...

Recommended for you

Scientists solve mystery shrouding oldest animal fossils

March 25, 2019

Scientists from The Australian National University (ANU) have discovered that 558 million-year-old Dickinsonia fossils do not reveal all of the features of the earliest known animals, which potentially had mouths and guts.

Earth's deep mantle flows dynamically

March 25, 2019

As ancient ocean floors plunge over 1,000 km into the Earth's deep interior, they cause hot rock in the lower mantle to flow much more dynamically than previously thought, finds a new UCL-led study.


Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.