Should We Be Afraid of the Dark? Dark Trading and Market Quality

55 Pages Posted: 16 Jun 2013 Last revised: 8 Feb 2016

See all articles by Sean Foley

Sean Foley

Macquarie University

Tālis J. Putniņš

University of Technology Sydney (UTS); Digital Finance CRC; Stockholm School of Economics, Riga

Date Written: January 27, 2016


We exploit a unique natural experiment—recent restrictions of dark trading in Canada and Australia—and proprietary trade-level data to analyze the effects of dark trading. Disaggregating two types of dark trading, we find that dark limit order markets are beneficial to market quality, reducing quoted, effective and realized spreads and increasing informational efficiency. In contrast, we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality. Our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision. We discuss implications for the regulation of dark trading and tick sizes.

Keywords: dark pool, dark trading, regulation, liquidity, market efficiency, transparency

JEL Classification: G14

Suggested Citation

Foley, Sean and Putnins, Talis J., Should We Be Afraid of the Dark? Dark Trading and Market Quality (January 27, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: or

Sean Foley

Macquarie University ( email )

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

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
+61 2 9514 3088 (Phone)

Digital Finance CRC ( email )

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
+371 67015841 (Phone)

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