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

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

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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%.
Original languageEnglish
Pages (from-to)1-22
Number of pages22
JournalJournal of Empirical Finance
Volume64
Early online date12 Aug 2021
DOIs
Publication statusPublished - Dec 2021

Keywords / Materials (for Non-textual outputs)

  • dark pools
  • adverse selection
  • market liquidity
  • pricing noise
  • informational efficiency

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