Dark Trading and Price Discovery
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
Tālis J. Putniņš
University of Technology, Sydney - UTS Business School; Stockholm School of Economics in Riga; Financial Research Network (FIRN)
September 12, 2014
Regulators around the world are concerned that growth in dark trading may harm price discovery. We show that block and non-block dark trades affect price discovery differently. We find no evidence that block trades in the dark impede price discovery. In contrast, high levels of non-block dark trading harms price discovery and reduces the informational efficiency of prices, while low levels of non-block dark trading can be beneficial. One reason non-block dark trading can be harmful is that the lack of pre-trade information reduces the market’s ability to infer and incorporate private information. Uninformed trades are more likely to execute in the dark, which increases adverse selection risk and bid-ask spreads in the transparent exchange.
Number of Pages in PDF File: 50
Keywords: dark pool, price discovery, information share, efficiency
JEL Classification: G14working papers series
Date posted: December 2, 2012 ; Last revised: September 12, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.296 seconds