Question

How do dark pools and high-frequency trading affect market efficiency?

Answer 1

Solution:-

INTRODUCTION

Dark pools are private exchange which is used for trading shares abd securities which are not accessible to the public who is required to be invested.This were created in order to facilitate block trading by the institutional investors whi did not wish to impact the market with thier large number of order and obtain adverse prices for thier trades.

High frequency trading is a method of trading that uses powerfull computer programme to transact large number of orders in a fractions of a second.

EXPLANATION

Under the dark pool an institutional investor can use this to sell his millions of stocks at a block.The lack transparancy actually work in the institutional investors favour's since it may result in a better realised price than if the sales was executed on an exchange.And the High frequency trading has improved market liquidity and removed bid-ask spreads that previously would have been too small.This was tested by adding fees on high frequency task as a result bid ask spreads increased.

CONCLUTION

Here from the above explanation we can conclude that Dark pool and High Frequency Trading affect market efficiency.Dark pool helps the market impact significantly reduced for large orders and it helps the market efficiency becuase it have lower transactio cost due to traders do not have to pay any exchange fee and in case of High Frequency Trading is complex algorithm trading in which large number of orders are executed within seconds and it adds liquidity to the market and eliminates small bid -ask spreads.