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City goes dark: Dark trading and adverse selection in aggregate markets

Gbenga Ibikunle, Matteo Aquilina, Ivan Diaz-Rainey and Yuxin Sun

Journal of Empirical Finance, 2021, vol. 64, issue C, 1-22

Abstract: We investigate the impact of dark trading on adverse selection in an aggregate market for trading UK stocks. Dark trading is linked to lower adverse selection risk and improved informational efficiency and liquidity in the aggregate market, even as liquidity declines in the lit market with dark trading. However, there is a trading value-based threshold when dark trading starts to induce adverse selection. We estimate that this threshold varies from around 9% for the most liquid stocks to 25% for the least liquid stocks. The overall average threshold for the 288 FTSE 350 stocks in our sample is 14%.

Keywords: Dark pools; Adverse selection; Market liquidity; Pricing noise; Informational efficiency (search for similar items in EconPapers)
JEL-codes: G10 G14 G15 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:64:y:2021:i:c:p:1-22

DOI: 10.1016/j.jempfin.2021.08.002

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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