Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision

59 Pages Posted: 22 Jun 2015

See all articles by Robert P. Bartlett

Robert P. Bartlett

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

Justin McCrary

Columbia University - Law School; National Bureau of Economic Research (NBER)

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Date Written: June 2015

Abstract

Using over eight trillion observations of market data, we use a regression discontinuity design to analyze the effect of increasing the minimum price variation (MPV) for quoting equity securities in light of recent proposals to increase the MPV from $0.01 to $0.05. We show that a larger MPV encourages investors to trade in dark venues at the midpoint of the national best bid and offer. Enhanced order flow to dark venues reduces price competition by exchange liquidity providers, especially those using high frequency trading (HFT). Trading in dark venues due to a wider MPV reduces volatility and increases trading volume.

Suggested Citation

Bartlett, Robert P. and McCrary, Justin, Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision (June 2015). NBER Working Paper No. w21286. Available at SSRN: https://ssrn.com/abstract=2621340

Robert P. Bartlett (Contact Author)

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

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

UC Berkeley School of Law
Berkeley, CA 94720

Justin McCrary

Columbia University - Law School ( email )

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New York, NY 10025
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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