Does Bid-Ask Spread Affect Trading in Exchange Operated Dark Pool? – Evidence From a Natural Experiment
41 Pages Posted: 3 Nov 2020
Date Written: November 29, 2019
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: Suggested Citation