The Dark Side of IPOs: Examining Where and Who Trades in the IPO Secondary Market

46 Pages Posted: 22 Apr 2018

See all articles by Justin Cox

Justin Cox

Appalachian State University

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Robert A. Van Ness

University of Mississippi - Department of Finance

Date Written: April 21, 2018

Abstract

We study the levels of lit and dark fragmentation in IPOs. Using a sample of 451 IPOs, we find that measures of dark and lit fragmentation are higher in underpriced issues. We further test the claim that IPO price uncertainty is not fully resolved at the offering and that this ex-post uncertainty is related to aftermarket fragmentation. Our analysis shows that fragmentation, both lit and dark, contribute to this ex-post uncertainty, resulting in greater underpricing. We also document that measures of hidden, algorithmic, and retail trading are higher among underpriced issues. Further, our results indicate that algorithmic trading is relatively low around the offering, increasing in the later periods of IPO trading. Finally, we show that measures of dark and hidden trading exhibit inverse patterns around the offering, confirming that the two forms of dark trading are substitutes rather than complements.

Keywords: Dark Trading, Lit Fragmentation, Hidden Trading, Algorithmic Trading, IPOs

JEL Classification: G12, G14

Suggested Citation

Cox, Justin and Van Ness, Bonnie F. and Van Ness, Robert A., The Dark Side of IPOs: Examining Where and Who Trades in the IPO Secondary Market (April 21, 2018). Available at SSRN: https://ssrn.com/abstract=3156655 or http://dx.doi.org/10.2139/ssrn.3156655

Justin Cox (Contact Author)

Appalachian State University ( email )

416 Howard Street
Boone, NC North Carolina 28604
United States

Bonnie F. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

Robert A. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

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