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

See all articles by Thomas Johann

Thomas Johann

University of Mannheim - Finance Area; University of Mannheim - Graduate School of Economic and Social Sciences

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Satchit Sagade

Goethe University Frankfurt - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Christian Westheide

University of Vienna - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Date Written: April 30, 2019

Abstract

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

Johann, Thomas and Putnins, Talis J. and Sagade, Satchit and Westheide, Christian, Quasi-Dark Trading: The Effects of Banning Dark Pools in a World of Many Alternatives (April 30, 2019). SAFE Working Paper No. 253. Available at SSRN: https://ssrn.com/abstract=3365994 or http://dx.doi.org/10.2139/ssrn.3365994

Thomas Johann

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

University of Mannheim - Graduate School of Economic and Social Sciences ( email )

D7, 27
Mannheim, 68131
Germany

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

Satchit Sagade

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany
+49 69 798 30085 (Phone)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 30085 (Phone)

Christian Westheide (Contact Author)

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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