Dark pools and high-frequency trading: a useful evolution?

Summary Technological and regulatory developments have favored the rise of two major phenomena associated with greater opacity: high frequency trading (HFT) and dark pools. One out of every two transactions is now made by HFT. Dark pools attract 10% of trading volume in Europe and 20% in the United States, notably because of the high frequency traders targeting uninformed orders that are exchanged there. Academic studies show that transaction costs have never been so low under the competitive pressure of HFT. However, they have been stable since 2009 even as speed continues to increase. Market efficiency has improved thanks to the arbitrage activity of THF. However, as trading volume shifts to dark pools, the risk of a deterioration in liquidity and efficiency increases. Add to this the risk of competitive distortion and operational and technological risk, and regulators are faced with increasingly complex issues.