Should we be afraid of the dark? Dark trading and market quality

Sean Foley and Talis Putnins

Journal of Financial Economics, 2016, vol. 122, issue 3, 456-481

Abstract: We exploit a unique natural experiment—recent restrictions of dark trading in Canada and Australia—and proprietary trade-level data to analyze the effects of dark trading. Disaggregating two types of dark trading, we find that dark limit order markets are beneficial to market quality, reducing quoted, effective, and realized spreads and increasing informational efficiency. In contrast, we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality. Our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision. We discuss implications for the regulation of dark trading and tick sizes.

Keywords: Dark pool; Dark trading; Regulation; Liquidity; Market efficiency; Transparency (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (65)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:122:y:2016:i:3:p:456-481

DOI: 10.1016/j.jfineco.2016.08.004

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