Does the bid–ask spread affect trading in exchange operated dark pools? Evidence from a natural experiment

Abstract

We exploit exogenous reductions in the minimum tick size to examine the effect of the bid–ask spread in the lit market on dark trading activity in the exchange operated dark pool in Japan. Stocks affected by the minimum tick size experience a decline in the share of trading in the exchange operated dark pool. The decrease in the share of dark trading is mostly evident among stocks with a constrained tick size prior to the tick size changes. Overall, our findings imply that reducing the minimum tick size can help lit venues regain market shares over dark venues.

Keywords: Dark trading; exchange operated dark pool; tick size change; bid–ask spread; Japanese market

JEL Classification: C21;G15; G28