Financial markets perform two main functions: price discovery and liquidity (O’Hara 2003). These functions are vital for the development of transparent and informationally efficient markets. The functions also have significant societal welfare implications. This is because how well financial markets provide liquidity and price discovery inform asset allocation decisions in the real economy. Consequently, the City, as the UK’s financial services sector in London is commonly called, being Europe’s largest financial centre and the world’s second largest, is vital to the smooth running of both the UK and global economies.
This project aims to examine the impact of the activities of a new breed of high-tech trading venues, dark pools, on the functioning of the systemically important financial markets in the City. By using ultra-high frequency trading data for the 350 largest stocks in the UK as traded on the four main markets in the City, the project will examine the impact of dark pools on overall quality of UK equity markets over the last half-decade (2010 – 2015). Market quality will be measured by computing proxies for informational efficiency, liquidity, price discovery, intraday volatility, and price impact. The relationship between dark pool trading and market fairness will also be investigated; market fairness metrics to be used include information leakage and end of day price dislocation. The links between firm asset allocation decision making and the functioning of financial markets places this project within an area of strategic importance to the Business School – Financial Decision Making. Funding is required mainly to engage a research assistant. Two academic journal publications are expected to arise from the work to be conducted in this project; projected possible outlets for the outputs include Journal of Financial Economics, Journal of Financial & Quantitative Analysis and Journal of Financial Markets. This project’s potential for impact is significant given the renewed focus of the European Securities and Markets Authority (ESMA) on regulating dark pools within the Markets in Financial Instruments Directive (MiFID) II framework, which is due in 2017.