How ‘dark pools’ can help public stock markets
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 happen. They are a growing presence in stock trading, now representing at least one-eighth, and possibly much more, of all stock trading volume in the U.S. But what is the effect of dark pools on “price discovery” — that is, the ongoing setting of prices on markets, which is thought to benefit from the transparency provided by public exchanges? At least one survey has shown that a clear majority of finance professionals — 71 percent — think dark pools are “somewhat” or “very” problematic in establishing stock prices. But a new paper by an MIT professor, to be published in the Review of Financial Studies, asserts that this is not necessarily...