The dark side of IPOs: Examining where and who trades in the IPO secondary market

Justin Cox, Bonnie Van Ness and Robert Van Ness

Financial Management, 2022, vol. 51, issue 4, 1091-1126

Abstract: We analyze the impact of trading dynamics, including fragmentation of markets, undisplayed (dark), and algorithmic trading, on liquidity formation in initial public offerings (IPOs). We find that these various trading dynamics evolve throughout the IPO secondary market and are dependent on the IPO's initial offering‐day underpricing. Higher levels of fragmentation in displayed (lit) markets and algorithmic trading improve market quality in IPOs, while higher levels of undisplayed (dark) trading harm it. Overall, we find that, with the exception of the impact of dark trading, the concerns regarding the impact of fragmented markets and algorithmic trading on IPO liquidity are mostly unwarranted.

Date: 2022
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