Dark Trading and the Fundamental Information in Stock Prices

Abstract

Theory suggests dark pools may facilitate or discourage price informativeness. We find that more dark trading leads to greater fundamental information in stock prices. To overcome endogeneity concerns we exploit the SEC’s Tick-Size Pilot Program that resulted in a large exogenous shock to dark pool trading. The results cannot be explained by lit market liquidity, high frequency trading, or price efficiency. In support of the information acquisition interpretation, we find a shift in the information acquisition through SEC EDGAR searches for the treatment firms. Overall, the evidence suggests dark trading improves the price informativeness of stock prices.

Keywords: Dark pools, informed trades, earnings information, price informativeness

JEL Classification: G14; G18