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.
Original language | English |
---|---|
Pages (from-to) | 456-481 |
Journal | Journal of Financial Economics |
Volume | 122 |
Issue number | 3 |
DOIs | |
Publication status | Published - Dec 2016 |
Keywords / Materials (for Non-textual outputs)
- dark pool
- dark trading
- regulation
- liquidity
- market efficiency
- transparency