Short Selling and Dark Pool Volume
Managerial Finance, Vol. 46, 2020
35 Pages Posted: 12 Jul 2021 Last revised: 27 Jul 2021
Date Written: April 29, 2020
Prior research posits that traders with short-lived information favor lit exchanges over dark pools due to execution certainty. This paper focuses on the relation between informed trading based on firm fundamentals and dark pool volume because the preferred venue for traders with longer-lived information is less certain. The proportion of trading volume executed in dark pools is positively correlated with short interest. This result is stronger for stocks that suffer from greater uncertainty and stocks targeted by transient institutional investors. Short sellers profit substantially from their information as subsequent returns are lower for heavily shorted stocks with greater dark pool volume.
Keywords: Dark pools; informed trading; liquidity; short selling; stock returns
JEL Classification: G10; G12
Suggested Citation: Suggested Citation