Two Shades of Opacity: Hidden Orders versus Dark Trading
57 Pages Posted: 6 Oct 2015 Last revised: 1 Jul 2018
Date Written: June 25, 2018
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: Suggested Citation