Do dark pools amplify volatility in times of stress?

Monica Petrescu, Michael Wedow and Natalia Lari

Applied Economics Letters, 2017, vol. 24, issue 1, 25-29

Abstract: In this article, we explore the relationship between trading on dark pools and equity volatility in the context of the recent concerns about increase in frequency of market shocks combined with changes in market microstructure. In order to understand the potential role of dark pools in times of stress and implications for financial stability, it is essential to investigate the relationship between investor trading preferences and market volatility. For our analysis, we use data on daily trading volumes of FTSE100 stocks on dark and lit order books. We find evidence that dark pool trading has explanatory power in predicting volatility, implying that dark pools may affect the dynamics of price formation through liquidity. Our findings suggest that increased use of dark pools does not increase volatility, but may in fact lower it. Thus, dark pools may not be significantly detrimental to market stability in times of stress. This highlights the need for further analysis of the effects that shifting financial market structure might have on financial stability.

Date: 2017
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DOI: 10.1080/13504851.2016.1158910

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