Shades of Darkness: A Pecking Order of Trading Venues

61 Pages Posted: 17 Oct 2014 Last revised: 27 Jun 2016

See all articles by Albert J. Menkveld

Albert J. Menkveld

Vrije Universiteit Amsterdam

Bart Zhou Yueshen

Singapore Management University - Lee Kong Chian School of Business

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: June 26, 2016

Abstract

We characterize the dynamic fragmentation of U.S. equity markets using a unique dataset that disaggregates dark transactions by venue types. The 'pecking order' hypothesis of trading venues states that investors 'sort' various venue types, putting low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint dark pools in the middle, and lit markets at the bottom. As predicted, following VIX shocks, macroeconomic news, and firms' earnings surprises, changes in venue market shares become progressively more positive (or less negative) down the pecking order. We further document heterogeneity across dark venue types and stock size groups.

Keywords: dark pool, pecking order, fragmentation

JEL Classification: G12, G14, G18, D47

Suggested Citation

Menkveld, Albert J. and Yueshen, Bart Zhou and Zhu, Haoxiang, Shades of Darkness: A Pecking Order of Trading Venues (June 26, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2510707 or http://dx.doi.org/10.2139/ssrn.2510707

Albert J. Menkveld

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Bart Zhou Yueshen (Contact Author)

Singapore Management University - Lee Kong Chian School of Business

50 Stamford Rd
Singapore, 178899
Singapore

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,468
Abstract Views
9,098
Rank
24,131
PlumX Metrics