Professor of Finance, KU Leuven—University of Leuven and Tilburg University and CEPR
PhD Student, KU Leuven—University of Leuven
MARK VAN ACHTER
Assistant Professor of Finance, Rotterdam School of Management, Erasmus University
Professor of Finance, KU Leuven—University of Leuven
Driven by technological innovations and regulatory changes during the last decades, trading venues nowadays compete more intensively to attract investors' order flow. Where investors used to be constrained to trade in the local exchange, they now face a wide array of trading systems where they could fulfill their trading needs. For instance, investors may opt to submit their orders to a venue that operates as a continuous limit order market (e.g., an electronic communication network [ECN] or in Europe a multilateral trading facility [MTF]). Other alternative trading systems (ATSs) are darker in nature (i.e., they are characterized by low or absent pretrade and posttrade transparency). Examples include over-the-counter (OTC) trading, broker-dealer internalized trades, and dark pools. This chapter focuses on dark pools.
Dark pools are trading venues that do not publicly display their orders. The benefit of using a dark pool is that orders remain hidden and investors can avoid the price impact of trades and front-running by brokers. As this is a particular concern for large institutional orders, dark pools were originally designed ...