Two Shades of Opacity: Hidden Orders versus Dark Trading

57 Pages Posted: 6 Oct 2015 Last revised: 1 Jul 2018

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Nikolaos Karagiannis

KU Leuven - Faculty of Business and Economics (FEB)

Geoffrey Tombeur

KU Leuven - University of Leuven

Gunther Wuyts

KU Leuven - University of Leuven

Date Written: June 25, 2018

Abstract

Regulators around the world are concerned that dark trading occurring away from lit venues may harm price discovery. An unanswered economic question is whether hidden orders on lit venues can substitute for dark trading. Hidden orders contribute to price discovery. Using a detailed high-frequency data set, we find that, in general, dark trading and hidden-order trading are substitutes. Hidden-order trading is chosen over dark trading on high volume days, when visible depth is small, the quoted spread is narrow and fewer traders employ smart order routers. Using the introduction of mid-point dark pools as quasi-natural experiments, we find that such introduction reduces hidden-order trading on all lit venues. These findings suggest that traders substitute between different shades of opacity.

Keywords: Dark Trading, Hidden Orders, Dark Pools, OTC Trading, Opacity, Transparency

JEL Classification: G10,G15

Suggested Citation

Degryse, Hans and Karagiannis, Nikolaos and Tombeur, Geoffrey and Wuyts, Gunther, Two Shades of Opacity: Hidden Orders versus Dark Trading (June 25, 2018). Available at SSRN: https://ssrn.com/abstract=2669447 or http://dx.doi.org/10.2139/ssrn.2669447

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nikolaos Karagiannis

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Geoffrey Tombeur

KU Leuven - University of Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Gunther Wuyts

KU Leuven - University of Leuven ( email )

KU Leuven - Faculty of Business and Economics
Naamsestraat 69
Leuven, Vlaams-Brabant 3000
Belgium
+3216326731 (Phone)

HOME PAGE: http://www.econ.kuleuven.be/gunther.wuyts

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