Dark Trading and Financial Markets Stability
Center for Financial Studies Working Paper No. 691, 2023
50 Pages Posted: 3 Jun 2019 Last revised: 21 Feb 2023
Date Written: June 24, 2020
This paper examines how the implementation of a new dark order - Midpoint Extended Life Order 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 M-ELO trading 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
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