Shades of Darkness: A Pecking Order of Trading Venues

Haoxiang Zhu, Bart Yueshen and Albert Menkveld
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Bart Yueshen: INSEAD

No 1164, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Investors trade in various types of venues. When demanding immediacy, they trade off price impact and execution uncertainty. The 'pecking order' hypothesis (POH) states that investors rank venues accordingly, with low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint pools in the middle, and lit markets at the bottom. When urgency increases, investors tilt their flow from top to bottom. We document such pattern for U.S. data, confirming POH. A simple model obtains POH in equilibrium and suggests that the availability of dark pools reduces investor (utility) cost by $1.43 billion annually.

Date: 2015
New Economics Papers: this item is included in nep-mst
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Journal Article: Shades of darkness: A pecking order of trading venues (2017)
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