Achieving Trust without Disclosure: Dark Pools and a Role for Secrecy-Preserving Verification

Abstract

Can an exchange be “dark,” so that orders are not displayed, while simultaneously trustworthy, so that the execution of trades and flow of information occur as promised? SEC actions against dark pools suggest cause for concern, and regulators seem to be moving towards requiring more disclosure. Yet there is a clear tension: trading order information is widely exploited. Therefore, institutional investors have a strong interest in keeping pre-trade information about large trades hidden. Secrecy-preserving proofs of correctness can be used to build trust without revealing unnecessary information. By performing operations on obfuscated representations of orders (perhaps encrypted or otherwise hidden), a zero knowledge proof can be provided, allowing anyone to verify correctness of trades. Crucially, this can be done without revealing any information beyond this correctness. This technology can be usefully applied to construct provably trustworthy dark pools. Additional practical protocols relax the definition of “zero knowledge" to reveal limited information, providing necessary transparency for efficient market operation while limiting information that can be exploited by observers. Coupled with Trusted Computing hardware, these protocols can provide an excellent balance of practicality with secrecy