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

University of Sydney Business School

Tālis J. Putniņš

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

Date Written: January 27, 2016

Abstract

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: https://ssrn.com/abstract=2279719 or http://dx.doi.org/10.2139/ssrn.2279719

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

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

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