Regulating Dark Trading: Order Flow Segmentation and Market Quality

50 Pages Posted: 31 Mar 2016 Last revised: 10 Jun 2017

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

University of Melbourne - Department of Finance; Centre for Economic Policy Research (CEPR)

Katya Malinova

McMaster University - Michael G. DeGroote School of Business

Andreas Park

University of Toronto; University of Toronto - Finance Area

Date Written: June 1, 2017

Abstract

We examine the impact of a rule in the Canadian equities market that requires dark orders to offer price improvement over displayed orders. We show that this rule eliminated intermediation of retail orders in the dark and shifted retail orders onto the lit market with the lowest trading fee. Intermediaries shifted liquidity supply to this market leading to increased displayed liquidity. We conclude that reducing retail order segmentation enhances lit liquidity. Despite the improvement in liquidity, retail traders receive less price improvement; retail brokers pay higher trading fees to exchanges, and high frequency traders earn higher revenues from trading fees.

Keywords: dark trading, high frequency trading, retail investors, trade-at rule, price improvement, segmentation, internalization

JEL Classification: G14

Suggested Citation

Comerton-Forde, Carole and Malinova, Katya and Park, Andreas, Regulating Dark Trading: Order Flow Segmentation and Market Quality (June 1, 2017). FIRN Research Paper No. 2755392, Available at SSRN: https://ssrn.com/abstract=2755392 or http://dx.doi.org/10.2139/ssrn.2755392

Carole Comerton-Forde (Contact Author)

University of Melbourne - Department of Finance ( email )

198 Berkeley Street
Carlton VIC 3010
Australia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Katya Malinova

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Andreas Park

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

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