Quasi-dark trading: The effects of banning dark pools in a world of many alternatives

Thomas Johann, Talis Putnins, Satchit Sagade and Christian Westheide

No 253, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We show that "quasi-dark" trading venues, i.e., markets with somewhat non-transparent trading mechanisms, are important parts of modern equity market structure alongside lit markets and dark pools. Using the European MiFID II regulation as a quasi-natural experiment, we find that dark pool bans lead to (i) volume spill-overs into quasi-dark trading mechanisms including periodic auctions and order internalization systems; (ii) little volume returning to transparent public markets; and consequently, (iii) a negligible impact on market liquidity and short-term price efficiency. These results show that quasi-dark markets serve as close substitutes for dark pools and consequently mitigate the effectiveness of dark pool regulation. Our findings highlight the need for a broader approach to transparency regulation in modern markets that takes into consideration the many alternative forms of quasi-dark trading.

Keywords: Dark Pools; Dark Trading; Liquidity; Price Efficiency; MiFID II; Double VolumeCaps (search for similar items in EconPapers)
JEL-codes: G10 G19 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:253

DOI: 10.2139/ssrn.3365994

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