Does Bid-Ask Spread Affect Trading in Exchange Operated Dark Pool? – Evidence From a Natural Experiment

41 Pages Posted: 3 Nov 2020

See all articles by Huu Nhan Duong

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Petko S. Kalev

La Trobe Business School

Xiao Tian

Independent

Date Written: November 29, 2019

Abstract

We exploit the exogenously instituted minimum tick size change to examine the dynamic relationship between the bid-ask spread in the lit market and dark trading activity in the exchange operated dark pool in Japan. Using a difference – in – differences methodology, we document a significant treatment effect where stocks that are affected by the minimum tick size change have a lower share of trading in the exchange operated dark pool. Overall, our empirical findings provide first-hand evidence that a significant amount of dark trading is liquidity seeking. Reducing minimum tick size can help lit venues regain market shares over dark venues.

Keywords: Darking Trading; Exchange Operated Dark Pool; Tick Size Change; Bid-Ask Spread; Japanese Market

JEL Classification: C21;G15; G28

Suggested Citation

Duong, Huu Nhan and Kalev, Petko S. and Tian, Xiao, Does Bid-Ask Spread Affect Trading in Exchange Operated Dark Pool? – Evidence From a Natural Experiment (November 29, 2019). Available at SSRN: https://ssrn.com/abstract=3692174 or http://dx.doi.org/10.2139/ssrn.3692174

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Petko S. Kalev

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

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