Should We Be Afraid of the Dark? Dark Trading and Market Quality
55 Pages Posted: 16 Jun 2013 Last revised: 8 Feb 2016
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: Suggested Citation