A law and economic analysis of trading through dark pools

Abstract

Purpose The purpose of this paper is to assess the latest directives of the European Parliament and the Council – MiFID II and MiFIR – on markets in financial instruments in response to the growth of dark pools in European equity markets. Design/methodology/approach This paper examines the impact of the new regulatory packages on European equity markets by identifying areas where the legislation is effective and comparing these changes in EU legislation with US legislation on dark pools. Findings This paper find that the MiFID II and MiFIR directives, implemented by the European Securities and Markets Authority to address these concerns, have reduced information asymmetry between market participants, thereby increasing competition between regulated markets and alternative trading facilities. Research limitations/implications Increased competition can improve market quality, which has practical implications for financial market regulation and policy formulation. Originality/value These findings are novel in the existing literature on high frequency trading through dark pools. They improve the understanding of dark trading and its impact on competition and market efficiency. In addition, this research can assist policymakers in designing effective financial market regulation. The economic analysis of legislation also helps regulators assess the impact of new legal provisions on the functioning of capital markets.