Why Do Traders Choose Dark Markets?
57 Pages Posted: 23 Sep 2014 Last revised: 4 Nov 2015
Date Written: November 4, 2014
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: Suggested Citation