Dark Trading on Public Exchanges

45 Pages Posted: 3 Dec 2012 Last revised: 23 Feb 2013

See all articles by Sean Foley

Sean Foley

Macquarie University

Katya Malinova

McMaster University - Michael G. DeGroote School of Business

Andreas Park

University of Toronto; University of Toronto - Finance Area

Date Written: 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.

Keywords: dark trading, midpoint orders, limit order book trading

JEL Classification: G14, G18

Suggested Citation

Foley, Sean and Malinova, Katya and Park, Andreas, Dark Trading on Public Exchanges (November 15, 2012). Available at SSRN: https://ssrn.com/abstract=2182839 or http://dx.doi.org/10.2139/ssrn.2182839

Sean Foley

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
0417702600 (Phone)

Katya Malinova

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4

Andreas Park (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6

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