Informational Linkages Between Dark and Lit Trading Venues

50 Pages Posted: 8 Jul 2011 Last revised: 27 Jul 2012

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: July 6, 2011

Abstract

We examine the linkages between dark and lit venues using a proprietary data set. We find that algorithmic trades for less liquid stocks lead to higher spreads and price impact, and correlated trading on the lit venues. Also, signed trades for these stocks predict future returns over the next 15 to 120 minutes. Trades for liquid stocks, trades by the dark venue brokerage desk, and members trading large blocks in negotiated crosses transmit less information to the lit venues. The results suggest that dark venues allow informed agents to trade strategically on both venues and facilitate the price discovery process.

Keywords: Crossing networks, algorithmic trading, price discovery, information trasmission

JEL Classification: D53, G12, G28

Suggested Citation

Nimalendran, Mahendrarajah and Ray, Sugata, Informational Linkages Between Dark and Lit Trading Venues (July 6, 2011). Available at SSRN: https://ssrn.com/abstract=1880070 or http://dx.doi.org/10.2139/ssrn.1880070

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9526 (Phone)
352-392-0301 (Fax)

Sugata Ray (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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