When Exchanges Are Not Exchanges: Evidence From Two Types of Dark Trading

Abstract

ATSs (Alternative Trading Systems) and non-ATSs are collectively referred to as "dark trading" and often studied as a unified entity. However, they markedly differ in their legal and economic attributes. Unlike ATSs, non-ATSs are not legally classified as "exchanges" and typically execute trades as principals. This structure grants non-ATSs greater flexibility and stronger incentives to exclude informed orders compared to ATSs. Consequently, we find that shocks increasing market transparency raise transaction costs on ATSs but reduce them on non-ATSs. Our results also help reconcile the ongoing debate on identifying retail trades. Boehmer et al. (2021) analyze data before our transparency shocks, while their critics use data afterward.

Keywords: Transparency, Dark Trading, ATSs (Alternative Trading Systems), Non-ATSs, Market Quality, Retail Trading