Dark Trading and Financial Markets Stability

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: 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