The value provided by dark pools outweighs the costs of occasional inferior prices, according to a paper published Thursday by the U.K. Financial Conduct Authority (FCA).
Major dark pools in the United Kindgom sometimes experience delays in receiving prices, but overall, “the costs associated with inferior reference prices are small, and do not outweigh the useful service dark pools provide,” the FCA says in a news release.
The paper’s authors found that approximately 3.5% of all trades in dark pools referenced a “stale” price (defined as prices that at least two milliseconds old), and in almost all (96%) of the trades that occur at stale prices in dark pools, high frequency traders (HFTs) are the beneficiaries of the discrepancy.
However, the paper also concludes that the impact of this trading at stale prices is not significant at approximately £4.2 million per year. “Overall, we find that the costs associated with inferior reference prices are small, and do not outweigh the useful service dark pools provide to market users by providing price improvement and reducing price impact,” the papers authors say.
“We do find evidence, however, that suggests dark pools sometimes experience significant delays in accessing data from other venues, and it is only the most sophisticated participants that systematically benefit from these delays,” they add.