Download this Paper Open PDF in Browser

Shades of Darkness: A Pecking Order of Trading Venues

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

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Bart Z. Yueshen

INSEAD - Finance

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 Z. 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

VU University Amsterdam ( email )

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

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Bart Yueshen (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

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

Paper statistics

Downloads
1,100
Rank
15,575
Abstract Views
4,700