Dark Pools - Investment Banking
Introduction
Dark pools are a complex topic subject to misunderstanding amongst the broad public, media, and government regulators. To help provide a better perspective, we discuss the evolution of equity markets that led to the development of electronic trading, dark pools, and current market structure. We move on to analyze dark pools and their overall impact on trading. We then discuss further aspects of dark pools in particular, and consider regulation and global trends in market structure.
Historical Perspective on Equity Markets
The first modern equity market was established in the Netherlands in 1610 with the publically traded shares of the Dutch East India Company. Financial transactions had taken place since the dawn of civilization, but 1610 was a milestone towards the development of the equity markets we know today. Because equity securities represent transferable ownership interests in corporations, dividing business organizations into small, affordable pieces made it easier for entrepreneurs to raise capital from multiple sources. At the same time, limited liability allowed investors to diversify their investments without fear of incurring risk of personal accountability. Enhanced liquidity also eased transfer of ownership.
Secondary markets for the securities of public firms quickly developed as the number of companies increased. Merchants and traders bought and sold securities just like other commodities, and specialization soon flourished. Stock exchanges were developed to enhance liquidity, transaction settlement, and protect broker commissions. The New York Stock Exchange(NYSE) originated out of the famous Buttonwood Agreement of 1792, in which a group of 24 brokers agreed to exclusively trade amongst themselves and fix commissions at a minimum of 0.25%; this system of fixed commissions lasted until 1975.
Technology has always played a prominent role in driving the evolution of financial markets. The invention of the telegraph and stock
Dark pools are a complex topic subject to misunderstanding amongst the broad public, media, and government regulators. To help provide a better perspective, we discuss the evolution of equity markets that led to the development of electronic trading, dark pools, and current market structure. We move on to analyze dark pools and their overall impact on trading. We then discuss further aspects of dark pools in particular, and consider regulation and global trends in market structure.
Historical Perspective on Equity Markets
The first modern equity market was established in the Netherlands in 1610 with the publically traded shares of the Dutch East India Company. Financial transactions had taken place since the dawn of civilization, but 1610 was a milestone towards the development of the equity markets we know today. Because equity securities represent transferable ownership interests in corporations, dividing business organizations into small, affordable pieces made it easier for entrepreneurs to raise capital from multiple sources. At the same time, limited liability allowed investors to diversify their investments without fear of incurring risk of personal accountability. Enhanced liquidity also eased transfer of ownership.
Secondary markets for the securities of public firms quickly developed as the number of companies increased. Merchants and traders bought and sold securities just like other commodities, and specialization soon flourished. Stock exchanges were developed to enhance liquidity, transaction settlement, and protect broker commissions. The New York Stock Exchange(NYSE) originated out of the famous Buttonwood Agreement of 1792, in which a group of 24 brokers agreed to exclusively trade amongst themselves and fix commissions at a minimum of 0.25%; this system of fixed commissions lasted until 1975.
Technology has always played a prominent role in driving the evolution of financial markets. The invention of the telegraph and stock