Regulators are concerned that large volumes of trading outside lit venues (i.e., dark trading) harms the functioning of financial markets. In contrast, regulators are neutral about hidden-order trading as these occur on lit venues and are associated with positive effects on market quality. An unanswered economic question concerns the interrelation between these two types of opaque trading, i.e., hidden orders and dark trading. Employing two different empirical methodologies we find that dark and hidden-order trading are substitutes. We also show that both types of opaque trading increase when markets are volatile and fewer algorithmic trading occurs. Smart order routing increases dark trading but reduces hidden-order activity.

We analyze a dynamic microstructure model in which a dealer market (DM) and a crossing network (CN) interact for three informational settings. A key result is that coexistence of trading systems generates systematic patterns in order flow, which depend on the degree of transparency. Further, we study overall welfare, measured by the gains from trade of all agents, and compare it with the maximum overall welfare. The discrepancy between both measures is attributable to two inefficiencies. Due to these inefficiencies, introducing a CN next to a DM, as well as increasing the transparency level, not necessarily produces greater overall welfare.

We analyze the resiliency of a pure limit order market by investigating the limit order book (bid and ask prices, spreads, depth and duration), order flow and transaction prices in a window of best limit updates and transactions around aggressive orders (orders that move prices). We find strong persistence in the submission of aggressive orders. Aggressive orders take place when spreads and depths are relatively low, and they induce bid and ask prices to be persistently different after the shock. Depth and spread remain also higher than just before the order, but do return to their initial level within 20 best limit updates after the shock. Relative to the sample average, depths stay around their mean before and after aggressive orders, whereas spreads return to their mean after about twenty best limit updates. The initial price impact of the aggressive order is partly reversed in the subsequent transactions. However, the aggressive order produces a long-term effect as prices show a tendency to return slowly to the price of the aggressive order.