Benchmarks are heavily wired into modern financial markets. For example, trillions of dollars in bank loans and several hundred trillion dollars (notional) of derivatives transactions depend on daily announcements of LIBOR. The WM/Reuters foreign exchange fixings dominate the currency markets, in which there are over $5 trillion of transactions per day. Benchmarks are the basis for trade of a wide range of commodities such as gold, silver, oil, and natural gas. They have also been the focus of scandals (Brousseau et al. 2013).
When big investors want to execute trades but fear the size of the transaction could move the market, they often go to dark pools—alternative trading systems where orders are not publicly displayed. These opaque trading venues, now accounting for about 12 percent of equity trading volume in the United States, have sparked concern among regulators and in the financial press. With so many transactions occurring out of public view, critics warn that price discovery, the accurate determination of asset prices, will become more difficult. Read More »