Does the bid–ask spread affect trading in exchange operated dark pools? Evidence from a natural experiment

47 Pages Posted: 3 Nov 2020 Last revised: 18 Feb 2023

See all articles by Huu Nhan Duong

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Petko S. Kalev

RoZetta Institute; La Trobe Business School

Xiao Tian

Swinburne University of Technology - Department of Accounting, Economics, and Finance

Date Written: May 28, 2022

Abstract

We exploit exogenous reductions in the minimum tick size to examine the effect of the bid–ask spread in the lit market on dark trading activity in the exchange operated dark pool in Japan. Stocks affected by the minimum tick size experience a decline in the share of trading in the exchange operated dark pool. The decrease in the share of dark trading is mostly evident among stocks with a constrained tick size prior to the tick size changes. Overall, our findings imply that reducing the minimum tick size can help lit venues regain market shares over dark venues.

Keywords: Dark trading; exchange operated dark pool; tick size change; bid–ask spread; Japanese market

JEL Classification: C21;G15; G28

Suggested Citation

Duong, Huu Nhan and Kalev, Petko S. and Tian, Xiao, Does the bid–ask spread affect trading in exchange operated dark pools? Evidence from a natural experiment (May 28, 2022). Journal of Economic Dynamics and Control, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3692174 or http://dx.doi.org/10.2139/ssrn.3692174

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Petko S. Kalev

RoZetta Institute ( email )

Sydney

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

Xiao Tian (Contact Author)

Swinburne University of Technology - Department of Accounting, Economics, and Finance ( email )

Cnr Wakefield and William Streets, Hawthorn Victor
3122 Victoria, Victoria 3122
Australia

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