The death of traditional stock markets

Economists usualy tend to divide financial systems in two: market-based and bank-based financial system. Critics argue that this view is getting outdated as banking has evolved away from its traditional activities of lending and facilitating payments. But it is often overlooked that today's stock market have nothing to do with the one of our fathers. It is fragmented in sub-markets, dark pools and other Alternative Trading Sytems (ATS) and Multilateral Trading Facilities (MTF) in Europe.

Trading of shares in these dark pool of liquidity has risen 45% in the past six months. It accounts for 8% of stock trading in Europe (it is twice as much in the U.S.) and 98% of institutional investors choose to execute their trades in these venues.

The graph above illustrates the volume of equity traded in dark pool in Europe main financial centers. So the European Commission decided to regulate these alternative trading venues, proposing a trading cap for any one stock of 4% per venues or 8% on a European market wide basis. The EU commission is also concerned with the effects of dark liquidity (these plateforms do not publicly display orders) on the price discovery of publicly lit markets.  Hence the insistance on pre-trade and post-trade transparency. 

Reading "Broken Markets" by Arnuk and Saluzzi, one learns that the problems lies also in the presence of High Frequency Trading algorythms, preying on institutional investors order flows. Some dark pool also sell information to HFT firms, some brokerage firms sell off-the-shelf- algorythms to their institutional clients, so that they can predict their clients trading patterns. Arnuk and Saluzzi's account of the "industry" rapid change suggests there are deeper forces at play (p.74):

Demutualization changed the ownership of the exchanges from a member-owned, nonprofut organization to a shareholder-owned, for-profit corporation. What was once thought of as a quasi-government utility-type organization would now be a bottom-line driven publicy traded, shareholder-focused company. The old method of having members vote on proposals and rule changes would be abolished. Exchanges would now make decisions by executives who reported to the board of directors who served the shareholders. Unfortunately, as we have seen all too often, shareholder interests and investor interests are not always the same.