54 Pages Posted: 2 Dec 2012 Last revised: 26 Jun 2015
Date Written: February 13, 2015
Regulators globally are concerned that dark trading harms price discovery. We show that dark trades are less informed than lit trades. High levels of dark trading increase adverse selection risk on the lit exchange by increasing the concentration of informed traders. Using both high- and low-frequency measures of informational efficiency we find that low levels of non-block dark trading are benign or even beneficial for informational efficiency, but high levels are harmful. In contrast, we find no evidence that block trades in the dark impede price discovery.
Keywords: dark pool, price discovery, information share, efficiency
JEL Classification: G14
Suggested Citation: Suggested Citation
Comerton-Forde, Carole and Putniņš, Tālis J., Dark Trading and Price Discovery (February 13, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2183392 or http://dx.doi.org/10.2139/ssrn.2183392
By Haoxiang Zhu