Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision

Robert P. Bartlett, III and Justin McCrary

No 21286, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using over eight trillion observations of market data, we use a regression discontinuity design to analyze the effect of increasing the minimum price variation (MPV) for quoting equity securities in light of recent proposals to increase the MPV from $0.01 to $0.05. We show that a larger MPV encourages investors to trade in dark venues at the midpoint of the national best bid and offer. Enhanced order flow to dark venues reduces price competition by exchange liquidity providers, especially those using high frequency trading (HFT). Trading in dark venues due to a wider MPV reduces volatility and increases trading volume.

JEL-codes: G10 G15 G18 G23 G28 K22 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-mst
Note: AP LE
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Citations: View citations in EconPapers (2)

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