Warwick Business School Assistant Professor Of Finance Chen Yao Comments On Barclays' Dark Pool Trading Operations

Commenting on the lawsuit against Barclays’ dark pool trading operations Warwick Business School Assistant Professor of Finance Chen Yao said: “By their very nature it is difficult for investors to know the rules of the game in dark pools. They are attractive because institutions can make large trades without disturbing the market and because shares are traded at one thousandth of a cent, rather than a cent in a public exchange.
 
“But there are concerns high-frequency traders are taking advantage of these opaque markets to front run other customers in the dark pool without them knowing. 

"Certainly some light needs shedding on dark pools as they are something of the ‘wild west’ of trading - who knows what goes on in them. The SEC may want to implement new rules following its investigation into Barclays’ LX dark pool, but to know what precisely needs to be done more research is needed into them. The data on dark pools is limited, and more data needs to be made available to researchers to further examine the issue.
 
“When an investor sends his order to the broker, it is the obligation of the broker to route the order to the trading platform with the best execution price. However, some of the brokers prefer to internalize the order flow and execute orders in their own pools if the execution price is at least as good as what can be achieved in other platforms. Brokerage firms like Barclays like internalization in their own dark pools because they can earn the price difference between what they buy and what they sell."