The Relevance of Dark Trading for Information Acquisition in German Stocks

23 Pages Posted: 22 Nov 2022

See all articles by Deelaka Ekanayake

Deelaka Ekanayake

The University of Western Australia - Department of Accounting and Finance

Lee A. Smales

University of Western Australia

Yuanji Wen

The University of Western Australia - Department of Accounting and Finance

Date Written: November 15, 2022

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

Suggested Citation

Ekanayake, Deelaka and Smales, Lee A. and Wen, Yuanji, The Relevance of Dark Trading for Information Acquisition in German Stocks (November 15, 2022). Available at SSRN: https://ssrn.com/abstract=4277248 or http://dx.doi.org/10.2139/ssrn.4277248

Deelaka Ekanayake

The University of Western Australia - Department of Accounting and Finance

Lee A. Smales (Contact Author)

University of Western Australia ( email )

UWA Business School
35 Stirling Highway
Perth, Western Australia 6009
Australia

Yuanji Wen

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
92
Abstract Views
359
Rank
546,463
PlumX Metrics