The effects of order segmentation by dark venues are damaging overall price discovery and market quality, and costing US investors billions of dollars, according to a study by Sydney-based Capital Markets Cooperative Research Centre (CMCRC).
For the research CMRC tracked approximately 300 different venues, including thirteen registered exchanges, forty or so active alternative trading systems (ATSs) and numerous broker dealer platforms.
It argues that the ability of dark pools to offer sub-penny tick sizes - and place different restrictions on pre-trade transparency and access than conventional lit markets - allow them to actively entice orders unrelated to the short-term directions of future price movements, resulting in higher transaction costs across all venues, and lower price efficiency overall.
The study does differentiate between small and large trade sizes, and stresses that block trading on non-NMS venues does not detract from market quality.
The report's authors propose three policy recommendations, inlcuding modifications to fair access rules, harmonisation of tick sizing, and action by regulators to demand that participants demonstrate meaningful price improvement as a result of their dark executions, and prioritisation of lit orders.
A study earlier this year by the Australian Securities and Investment Commission found that as dark pools increasingly handled smaller order types similar to those on 'lit' exchange markets this had a malign influence on prices in some securities. The working group conducting the study called for improved disclosure and supervision of dark trading and the plugging of regulatory gaps.