Volatility and dark trading: Evidence from the Covid-19 pandemic

Gbenga Ibikunle; Khaladdin Rzayev

doi:10.1016/j.bar.2022.101171

Volatility and dark trading: Evidence from the Covid-19 pandemic

Gbenga Ibikunle, Khaladdin Rzayev^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract / Description of output

We study the effect(s) of volatility on the share of trading in dark pools by exploiting the exogenous shock of the Covid-19 pandemic on financial markets and regulatory restrictions on dark trading. We find that high levels of volatility in lit exchanges is linked to an economically significant loss of market share by dark pools to lit exchanges. In line with the theory, the loss appears to be driven by informed traders’ migration from lit to dark markets during high volatility periods. The market quality implications of the trading dynamics are mixed: while it tempers liquidity decline in the lit market, it exacerbates the loss of informational efficiency.

Original language	English
Article number	101171
Pages (from-to)	1-23
Number of pages	23
Journal	The British Accounting Review
Volume	55
Issue number	4
Early online date	22 Dec 2022
DOIs	https://doi.org/10.1016/j.bar.2022.101171
Publication status	Published - Jul 2023

Keywords / Materials (for Non-textual outputs)

Covid-19
dark pools
venue selection
liquidity
market quality

Access to Document

10.1016/j.bar.2022.101171Licence: Creative Commons: Attribution (CC-BY)

IbikunleGRzayevK2023BARVolatilityAndDarkTradingFinal published version, 1.07 MBLicence: Creative Commons: Attribution (CC-BY)

Cite this

@article{bb60236c4c9e4dd3bb25e090ee0fa32a,

title = "Volatility and dark trading: Evidence from the Covid-19 pandemic",

abstract = "We study the effect(s) of volatility on the share of trading in dark pools by exploiting the exogenous shock of the Covid-19 pandemic on financial markets and regulatory restrictions on dark trading. We find that high levels of volatility in lit exchanges is linked to an economically significant loss of market share by dark pools to lit exchanges. In line with the theory, the loss appears to be driven by informed traders{\textquoteright} migration from lit to dark markets during high volatility periods. The market quality implications of the trading dynamics are mixed: while it tempers liquidity decline in the lit market, it exacerbates the loss of informational efficiency.",

keywords = "Covid-19, dark pools, venue selection, liquidity, market quality",

author = "Gbenga Ibikunle and Khaladdin Rzayev",

note = "Funding Information: Rzayev gratefully acknowledges the support of the Trans-Atlantic Platform by the Economic and Social Research Council (ESRC) [grant number ES/R004021/1 ]. Publisher Copyright: {\textcopyright} 2022",

year = "2023",

month = jul,

doi = "10.1016/j.bar.2022.101171",

language = "English",

volume = "55",

pages = "1--23",

journal = "The British Accounting Review",

issn = "0890-8389",

publisher = "Academic Press",

number = "4",

}

TY - JOUR

T1 - Volatility and dark trading

T2 - Evidence from the Covid-19 pandemic

AU - Ibikunle, Gbenga

AU - Rzayev, Khaladdin

N1 - Funding Information: Rzayev gratefully acknowledges the support of the Trans-Atlantic Platform by the Economic and Social Research Council (ESRC) [grant number ES/R004021/1 ]. Publisher Copyright: © 2022

PY - 2023/7

Y1 - 2023/7

N2 - We study the effect(s) of volatility on the share of trading in dark pools by exploiting the exogenous shock of the Covid-19 pandemic on financial markets and regulatory restrictions on dark trading. We find that high levels of volatility in lit exchanges is linked to an economically significant loss of market share by dark pools to lit exchanges. In line with the theory, the loss appears to be driven by informed traders’ migration from lit to dark markets during high volatility periods. The market quality implications of the trading dynamics are mixed: while it tempers liquidity decline in the lit market, it exacerbates the loss of informational efficiency.

AB - We study the effect(s) of volatility on the share of trading in dark pools by exploiting the exogenous shock of the Covid-19 pandemic on financial markets and regulatory restrictions on dark trading. We find that high levels of volatility in lit exchanges is linked to an economically significant loss of market share by dark pools to lit exchanges. In line with the theory, the loss appears to be driven by informed traders’ migration from lit to dark markets during high volatility periods. The market quality implications of the trading dynamics are mixed: while it tempers liquidity decline in the lit market, it exacerbates the loss of informational efficiency.

KW - Covid-19

KW - dark pools

KW - venue selection

KW - liquidity

KW - market quality

U2 - 10.1016/j.bar.2022.101171

DO - 10.1016/j.bar.2022.101171

M3 - Article

SN - 0890-8389

VL - 55

SP - 1

EP - 23

JO - The British Accounting Review

JF - The British Accounting Review

IS - 4

M1 - 101171

ER -

Volatility and dark trading: Evidence from the Covid-19 pandemic

Abstract / Description of output

Keywords / Materials (for Non-textual outputs)

Access to Document

Fingerprint

Cite this