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Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Stale Quote Arbitrage?

53 Pages Posted: 12 Jun 2015 Last revised: 3 Nov 2016

Robert P. Bartlett III

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Justin McCrary

University of California, Berkeley; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2016

Abstract

Prevailing research posits that liquidity providers bypass long queue lines on exchanges by offering liquidity in dark venues with de minimis sub-penny price improvement, thus exploiting an exception to the penny quote rule. We show that (a) the SEC enforces the quote rule to prevent sub-penny queue-jumping in dark pools unless trades are “pegged” to the NBBO midpoint and (b) the documented increase in dark trading due to investor queue-jumping stems from increased midpoint trading. Although encouraging pegged orders can subject traders to stale quote arbitrage, we show it could have affected no more than 5% of our sample midpoint trades.

Keywords: dark pools; high-frequency trading; tick sizes; market structure

JEL Classification: G10, G15, G18, G23, G28, K22

Suggested Citation

Bartlett, Robert P. and McCrary, Justin, Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Stale Quote Arbitrage? (October 25, 2016). UC Berkeley Public Law Research Paper No. 2616992. Available at SSRN: https://ssrn.com/abstract=2616992 or http://dx.doi.org/10.2139/ssrn.2616992

Robert P. Bartlett III (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-642-6646 (Phone)

University of California, Berkeley - Berkeley Center for Law, Business and the Economy

UC Berkeley School of Law
Berkeley, CA 94720

Justin McCrary

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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