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

See all articles by Jorge Goncalves

Jorge Goncalves

Universite du Luxembourg - Luxembourg Centre for Systems Biomedicine

Roman Kräussl

Bayes Business School (formerly Cass); Hoover Institution, Stanford University

Vladimir Levin

Universite du Luxembourg

Date Written: June 24, 2020

Abstract

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

Suggested Citation

Goncalves, Jorge and Kraeussl, Roman and Levin, Vladimir, Dark Trading and Financial Markets Stability (June 24, 2020). Center for Financial Studies Working Paper No. 691, 2023, Available at SSRN: https://ssrn.com/abstract=3384719 or http://dx.doi.org/10.2139/ssrn.3384719

Jorge Goncalves

Universite du Luxembourg - Luxembourg Centre for Systems Biomedicine ( email )

6, avenue du Swing
Belvaux, 4367
Luxembourg

Roman Kraeussl

Bayes Business School (formerly Cass) ( email )

London
106 Bunhill Row
EC1Y 8TZ
United Kingdom

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Vladimir Levin (Contact Author)

Universite du Luxembourg ( email )

6,Rue Richard Coudenhove-Kalergi
L-1359 Luxembourg
Luxembourg
+352 466644-5826 (Phone)

HOME PAGE: http://www.vladimirlevin.com

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