Differential Access to Dark Markets and Execution Outcomes

Abstract

We compare execution outcomes in dark pools that are open to all investors against outcomes in pools that restrict high frequency trader access. Conditional on execution, trades in restricted pools have less order flow information leakage and adverse selection risk than trades in pools with unrestricted access. Dark pools that completely prohibit high frequency traders have less order flow information leakage than those that allow customers to opt-out of interacting with this type of order flow. Differences in execution outcomes are concentrated in smaller trades. We conclude that the ability to segment order flow can improve execution outcomes for investors.

Keywords: Dark trading, execution quality, high frequency trading

JEL Classification: G12, G14