The Rise of Dark Pools: Impact on Price Discovery and Market Quality
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Market structure in the U.S. is complex and filled with numerous regulations matched only by the number of people trying to circumvent them. This paper examines a specific segment of the market- dark pools. Specifically, it looks at the possibility that dark pools, when placed alongside public exchanges, adversely affect the price discovery process, and therefore general market quality. The validity of this claim is inspected both empirically and theoretically. A literature review of Haoxiang Zhu's thesis "Do Dark Pools Harm Price Discovery?" provides a quantitative perspective that shows that, under normal conditions, the addition of a specific type of dark pool will not harm the price discovery process and will, in fact, reduce excess market noise. This work can provide an important backdrop in determining current and future regulatory practices designed to protect and serve investors.