Quasi-Dark Trading: The Effects of Banning Dark Pools in a World of Many Alternatives
62 Pages Posted: 28 May 2019 Last revised: 25 Jun 2019
Date Written: April 30, 2019
We show that “quasi-dark” trading venues, i.e., markets with somewhat non-transparent trading mechanisms, are important parts of modern equity market structure alongside lit markets and dark pools. Using the European MiFID II regulation as a quasi-natural experiment, we find that dark pool bans lead to (i) volume spill-overs into quasi-dark trading mechanisms including periodic auctions and order internalization systems; (ii) little volume returning to transparent public markets; and consequently, (iii) a negligible impact on market liquidity and short-term price efficiency. These results show that quasi-dark markets serve as close substitutes for dark pools and consequently mitigate the effectiveness of dark pool regulation. Our findings highlight the need for a broader approach to transparency regulation in modern markets that takes into consideration the many alternative forms of quasi-dark trading.
Keywords: Dark Pools, Dark Trading, Liquidity, Price Efficiency, MiFID II, Double Volume Caps
JEL Classification: G10, G19
Suggested Citation: Suggested Citation