Just when we got a handle on mortgage-backed securities, another inscrutable financial tool has joined the block: dark pools.
Ravi Narain, head of the National Stock Exchange of India, recently told the Financial Times that he was “extremely disturbed” by their proliferation.
Dark pools are bulk trades executed outside formal exchanges, where traders can swap shares, declaring prices only after the transactions are completed. As telecommunications costs have plummeted, it was inevitable that traders would execute transactions outside conventional exchanges. Investors do have an incentive to trade privately since it is cheaper.
Encouraging liquidity is a good thing. But increased liquidity cannot come at the expense of transparency—and outside regulatory scrutiny.
The current slowdown was partially fuelled by an overvaluation of complex financial instruments— because of a kind of information asymmetry. If the crisis has taught us anything, it’s that transparency is key.