Professor of Finance, University of Melbourne
Equity markets around the world have changed fundamentally over the past two decades. In the late 1990s, most countries had a single national exchange operating as a mutual organization. Today, most exchanges are publicly listed for-profit corporations. Regulatory reforms promoting competition for trading services mean that in many countries the incumbent exchange, which had been a monopoly, now faces intense competition for trading services. As a result, trading is fragmented across multiple trading venues.
Technology has also been a major driver of change. Substantial innovation has occurred in the delivery of trading services to the market. Most important is the emphasis on low-latency trading, which has brought with it a new breed of low-latency traders (typically referred to as high-frequency traders). However, innovation has also occurred in the types of trading services available, which include new mechanisms to trade without pretrade transparency (typically referred to as dark liquidity).
This chapter explores current issues in equity markets that have arisen because of these structural changes. It describes the fragmentation of equity markets and the factors contributing to the success of new entrants. It focuses on the two most debated issues in equity markets today: high-frequency trading (HFT) and dark pools. The chapter defines these issues, ...