Dark Trading Volume and Market Quality: A Natural Experiment

53 Pages Posted: 18 Dec 2017 Last revised: 3 Apr 2018

See all articles by Ryan Farley

Ryan Farley

University of Tennessee, Knoxville

Eric K. Kelley

University of Tennessee, Knoxville

Andy Puckett

University of Tennessee, Knoxville

Date Written: March 16, 2018

Abstract

We exploit an exogenous shock to dark trading volume to identify the causal effect of changes in dark trading volume on market quality. Following a 34% reduction in dark trading, the cost of trade (e.g. effective spreads, realized spreads, price impact, and quoted spreads) remain unchanged. We also find limited evidence that prices become less efficient. We show that other variables relating to overall trading activity and how trades are dispersed across lit venues change only modestly compared to the shock to dark trading, and we argue that offsetting effects are unlikely to contaminate the experiment. Our main inference differs significantly from prior studies that conclude increases in dark trading negatively affect market quality. We provide robust evidence that differences in inference cannot be attributed to different stock samples or time periods, but rather are the result of different empirical approaches. Our research highlights the benefit of structured experimentation from the Securities and Exchange Commission (SEC) for understanding causal effects in capital markets.

Keywords: Market Fragmentation, Microstructure, Market Efficiency

JEL Classification: G14

Suggested Citation

Farley, Ryan and Kelley, Eric K. and Puckett, Andy, Dark Trading Volume and Market Quality: A Natural Experiment (March 16, 2018). 13th Annual Mid-Atlantic Research Conference in Finance (MARC) Paper. Available at SSRN: https://ssrn.com/abstract=3088715 or http://dx.doi.org/10.2139/ssrn.3088715

Ryan Farley

University of Tennessee, Knoxville ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

Eric K. Kelley

University of Tennessee, Knoxville ( email )

916 Volunteer Blvd
Knoxville, TN 37996
United States

Andy Puckett (Contact Author)

University of Tennessee, Knoxville ( email )

437 Stokely Managment Center
Knoxville, TN 37996
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
158
Abstract Views
650
rank
188,945
PlumX Metrics