Abstract

http://ssrn.com/abstract=2182839
 
 

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Dark Trading on Public Exchanges


Sean Foley


University of Sydney; Capital Markets CRC Limited

Katya Malinova


University of Toronto; Copenhagen Business School

Andreas Park


University of Toronto - Department of Economics; Copenhagen Business School

November 15, 2012


Abstract:     
Over the last decade, market participants increasingly use trading tools that allow them to hide their trading intentions. We study how “dark trading” in the form of fully hidden, or dark, orders posted on a visible exchange affects the quality of the visible market. Dark orders were introduced on the Toronto Stock Exchange in 2011 in two stages, allowing us to employ a difference-in-differences approach to isolate the causal effect of the availability of dark trading. Using order-level data, we observe that the introduction of dark orders led to a widening of quoted spreads and an increase in trading costs, leaving depth, volume, and volatility unaffected. At the intra-day level, dark trading leads to decreased quoted spreads, increased depth, increased volume and to reduced trading costs and volatility. We interpret our findings as two sides of the same coin: the possible presence of dark liquidity causes market participants to post visible quotes more carefully. Upon detecting dark executions, however, traders infer that dark liquidity is diminished and thus post quotes more aggressively.

Number of Pages in PDF File: 45

Keywords: dark trading, midpoint orders, limit order book trading

JEL Classification: G14, G18

working papers series


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Date posted: December 3, 2012 ; Last revised: February 23, 2013

Suggested Citation

Foley, Sean and Malinova, Katya and Park, Andreas, Dark Trading on Public Exchanges (November 15, 2012). Available at SSRN: http://ssrn.com/abstract=2182839 or http://dx.doi.org/10.2139/ssrn.2182839

Contact Information

Sean Foley
University of Sydney ( email )
Sydney
Australia
Capital Markets CRC Limited ( email )
GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia
Katya Malinova
University of Toronto ( email )
Toronto, Ontario M5S 3G8
Canada
HOME PAGE: http://individual.utoronto.ca/kmalinova/
Copenhagen Business School ( email )
Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
Andreas Park (Contact Author)
University of Toronto - Department of Economics ( email )
150 St. George Street
Toronto, Ontario M5S3G7
Canada
HOME PAGE: http://www.chass.utoronto.ca/~apark/
Copenhagen Business School ( email )
Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
HOME PAGE: http://sites.google.com/site/parkandreas/
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References:  28
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