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)
November 19, 2013
Regulators around the world are concerned that growth in dark trading may harm price discovery. We find that low levels of dark trading can be beneficial, but high levels impede price discovery and reduce the informational efficiency of prices. One reason 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. We find no evidence that block trades in the dark impede price discovery.
Number of Pages in PDF File: 56
Keywords: dark pool, price discovery, information share, efficiency
JEL Classification: G14working papers series
Date posted: December 2, 2012 ; Last revised: November 20, 2013
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.359 seconds