Dark Trading and Financial Markets Stability

Abstract

This paper examines how the implementation of a new dark order - Midpoint Extended Life Order (M-ELO) on NASDAQ - impacts financial markets stability in terms of occurrences of mini-flash crashes in individual securities. We use high-frequency order book data and apply panel regression analysis to estimate the effect of dark order trading activity on market stability and liquidity provision. The results suggest a predominance of a speed bump effect of M-ELO rather than a darkness effect. We find that the introduction of M-ELO increases market stability by reducing the average number of mini-flash crashes, but its impact on market quality is mixed.

Keywords: Market microstructure, financial market stability, mini-flash crash, dark trading, speed bump, investor protection

JEL Classification: G10, G14