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

43 Pages Posted: 13 Apr 2024

See all articles by Yunus Topbas

Yunus Topbas

Peking University HSBC Business School

Mao Ye

Cornell University; National Bureau of Economic Research (NBER)

Date Written: March 14, 2024


Trading outside national securities exchanges is often collectively referred to as dark trading. Nonetheless, it encompasses ATSs and non-ATSs, each with distinct legal and economic characteristics. ATSs, unlike non-ATSs, are legally classified and treated as "exchanges" and primarily act as agents in executing trades. We examine two exogenous and identical transparency shocks and demonstrate that transparency tends to yield contrasting outcomes regarding market quality for ATSs and non-ATSs. Transparency unambiguously attracts more orders and improves execution speeds. However, it notably diminishes other market quality metrics on ATSs, while remarkably enhancing them on non-ATSs. Our results also contribute to an ongoing debate about the accuracy of (Boehmer, Jones, Zhang, & Zhang, 2021)’s (BJZZ) method in identifying retail trades. We offer new explanations for the disparities between BJZZ’s conclusions and its critiques. Finally, our paper is closely tied to two recent SEC proposals aimed at enhancing execution quality disclosures and improving the retail trading landscape.

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

Suggested Citation

Topbas, Yunus and Ye, Mao, When Exchanges Are Not Exchanges: Evidence From Two Types of Dark Trading (March 14, 2024). Available at SSRN: https://ssrn.com/abstract=4759130 or http://dx.doi.org/10.2139/ssrn.4759130

Yunus Topbas (Contact Author)

Peking University HSBC Business School ( email )

Mao Ye

Cornell University ( email )

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National Bureau of Economic Research (NBER) ( email )

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