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Given the fact that the non-exchange trading has increased significantly (in volumes) especially in the past decade and also, the fact that the price at which the transactions happen here are hidden from the public, is it not affecting the fair price discovery of the securities where the majority volumes are traded on these platforms?

And if that is so, why do dark pools still exist?

  • Are you saying that dark pools are now mainstream and therefore (?) shouldn’t exist? – Lawrence Aug 24 at 10:08
  • @Lawrence No sir, I am absolutely not saying anything like that. All I mean to ask is how are the pros offered by these so important that as of now the regulators seem to be ok with making the compromise with the hindrance in fair price discovery (for those outside the non-exchanges which BTW is a big population) that is posed by Dark Pools. – CCCC Aug 24 at 11:04
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Short answer: because stock exchanges are not monopolies.

Dark pools do deprive the market of price discovery, sometimes significantly. Dark pools exist because of low transaction costs and an owner or buyer of stock is not obligated to use a stock exchange. The primary reason for stock exchanges is providing market makers, entities always ready to buy or sell stock. If parties decide they do not require market making services there is nothing obligating them to use them. If I own shares that you wish to buy there is absolutely nothing preventing me from selling them to you directly and dis-intermediating the stock exchange. Private sales are practically a right in capitalistic societies and that extends to stock sales. The market is not entitled to price discovery.

Here's another scenario: If you own a house should you be required to use an agent to sell it? If I buy your house directly from you ("for sale by owner") we deprive the market of price discovery (private real estate sales, although recorded in public documents, are almost never entered into the data appraisers and agents use) and agents of commission. Obligating market participants to reveal details of their private transactions would violate the free market principles espoused so vehemently by the financial profession and would especially be bitterly opposed by institutional investors who routinely trade among themselves directly, even outside dark pools.

Exchanges have no special legal claim to transaction data outside their own transactions.

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