Doctoral thesis: Examining the imperfect financial market

Recent market failures such as the Flash Crash of 2010 have highlighted the importance of understanding and acknowledging the implications of market frictions and imperfections, that is how financial market functionality can be hampered by aspects such as regulation, market microstructure or deviant investor behavior.

"Imperfections ranging from transaction costs to unequal market access undoubtedly exist, but we should be careful not to hastily jump to false conclusions regarding their implications for retail investors", Salla Pöyry argues based on the results in her doctoral thesis "Essays on financial market frictions and imperfections", referring to the recent media discussion on the impact of dark pool trading on retail investors.

As a part of her thesis, Pöyry has studied the impact of market fragmentation and the introduction of dark pool trading venues, enabled by MiFID in November 2007 on private investors. In December 2010, only 62,4% of the volume in Nordic equities was traded on venues with a visible order book. It has been suggested that this regulatory change has deteriorated market quality and put some investors at a disadvantage - for instance, non-professional investors with no direct access to these venues.

Pöyry's results suggest that dark pool trading volumes are concentrated in highly liquid stocks with less price uncertainty or that comprise of large block transactions. Using data from the Finnish Central Securities Depository covering all stock transactions by domestic investors in Finnish equities, the results show that higher dark pool volumes coincide with lower intra-day price dispersion and volatility among retail investors. Hence, the results suggest that dark pools venues have not disadvantaged retail investors. Overall, the effects of the liquidity drainage to dark pool trading venues are trivial in terms of economic magnitude for the average retail investor trading on the NASDAQ OMX Helsinki Exchange.

"Based on these findings, the average retail investor is far more likely to have benefited from the decrease in trading costs that has followed from the introduction of new trading platforms, than suffered from the partial deterioration in transparency", Pöyry concludes.

While it may be tempting, and perhaps appropriate, to impose additional regulation on the less transparent trading venues, the results suggest that this should not be done solely to protect the less sophisticated investor categories, such as retail investors.

M.Sc. (Econ.) Salla Pöyry defends her doctoral thesis in finance "Essays on financial market frictions and imperfections" on 15 August 2014.

Time: 15 August 2014, at 12
Place: Hanken Svenska handelshögskolan, Helsinki, Finland
Opponent: Professor Markku Kaustia, Aalto University Business School, Finland
Custos: Professor Timo Korkeamäki, Hanken School of Economics, Finland

For more information, please contact: 

Salla Pöyry 

+358 40 5604660
salla.poyry@hanken.fi Opens in new window

A copy of the thesis can be downloaded here Opens in new window .