Why Do Traders Choose Dark Markets?

57 Pages Posted: 23 Sep 2014 Last revised: 4 Nov 2015

See all articles by Ryan Garvey

Ryan Garvey

Duquesne University

Tao Huang

Beijing Normal University-Hong Kong Baptist University United International College

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: November 4, 2014

Abstract

We examine factors that influence U.S. equity trader choice between dark and lit markets. Marketable orders executed in the dark are larger in size. They also receive favorable prices and incur minimal price impact. However, dark orders take longer to execute and have lower fill rates. Traders are more likely to go dark when information asymmetry is greater or when the bid-ask spread is wider and quoted depth is higher. Although market regulators have expressed concern over the rise in dark trading, our results indicate dark markets provide important benefits to traders which lit markets do not.

Keywords: Dark Market, price impact, marketable order

JEL Classification: G19

Suggested Citation

Garvey, Ryan and Huang, Tao and Wu, Fei, Why Do Traders Choose Dark Markets? (November 4, 2014). Asian Finance Association (AsianFA) 2015 Conference Paper, Available at SSRN: https://ssrn.com/abstract=2500123 or http://dx.doi.org/10.2139/ssrn.2500123

Ryan Garvey

Duquesne University ( email )

600 Forbes Avenue
Pittsburgh, PA 15282
United States

Tao Huang (Contact Author)

Beijing Normal University-Hong Kong Baptist University United International College ( email )

2000 Jintong Road
Zhuhai, Guangdong 519087
China

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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