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Dark Trading on Public Exchanges

Sean Foley

University of Sydney

Katya Malinova

University of Toronto

Andreas Park

University of Toronto - Department of Economics; University of Toronto - Finance Area; University of Toronto at Mississauga - Department of Management

November 15, 2012

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

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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 )
Katya Malinova
University of Toronto ( email )
Department of Statistical Sciences
Toronto, Ontario M5S 3G8
HOME PAGE: http://individual.utoronto.ca/kmalinova/
Andreas Park (Contact Author)
University of Toronto - Department of Economics ( email )
150 St. George Street
Toronto, Ontario M5S3G7
HOME PAGE: http://www.chass.utoronto.ca/~apark/
University of Toronto - Finance Area ( email )
Toronto, Ontario M5S 3E6

University of Toronto at Mississauga - Department of Management ( email )

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References:  14
Citations:  1
Footnotes:  16

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