The Relevance of Dark Trading for Information Acquisition in German Stocks

Abstract

We investigate the information acquisition role of dark pool trading. The implementation of the European double volume cap (DVC) mechanism acts as an exogenous shock to help us understand how restrictions on dark trading affect the price discovery process for German stocks. Using the price jump ratio as a measure of information acquisition ahead of earnings announcements, we show that it is aided by dark pool trading. This relationship is concentrated in trading ahead of negative earnings news, for stocks that are hard to value (small firms and value stocks), and when there is high uncertainty around earnings (low analyst coverage and large analyst disagreement). The DVC mechanism reduces the proportion of dark pool trading in stocks that trigger suspensions and reduces pre-announcement information acquisition, amplifying the market response to earnings news.

Keywords: Dark pools, information acquisition, informed trading, price informativeness, earnings announcement

JEL Classification: G10, G14, G18