Question

explain Flash Trading and Dark Pools. Do you think they are fair? Why or Why Not? How should the government regulate them?

Answer 1

Flash trading is a debatable trading practice where a creamy layer of investors/clients can view orders before the general public. This is termed as an unfair practice by many since it allows a small portion of the clients an unfair advantage in the market. Due to the agitation, many exchanges has been removed the practice for fairness.

Darkpools are like Over the counter trading where trading of securities which are not accessible to public happens. It came into existence to facilitate block trading by big players who did not want to affect the market prices with their bulk oreders. It lacks transparency and due to this there can exist conflict of interest or predatory trading practices which can affect the market. Based on types, there are Broker dealer owned dark pool, agency broker owned dark pool, electronic market makers dark pool etc.

To avoid flash trading the government can bring regulations to eliminate the legality of flash trading. Eventhough there was proposal for such rules, till now no rule has been passed. Government can bring regulations to increase the transparency in darkpool so that everyone is aware of the deals. SEC has introduced trade at rule which is intended to bring the market share back from such trades.