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Journal of Financial Economics Vol. 122 No. 3 2016

Should we be afraid of the dark? Dark trading and market quality

Sean Foley1; Tālis J. Putniņš2,3

1 The University of Sydney · 2 Stockholm School of Economics in Riga · 3 University of Technology Sydney

open access

Abstract

We exploit a unique natural experiment—recent restrictions of dark trading in Canada and Australia—and proprietary trade-level data to analyze the effects of dark trading. Disaggregating two types of dark trading, we find that dark limit order markets are beneficial to market quality, reducing quoted, effective, and realized spreads and increasing informational efficiency. In contrast, we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality. Our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision. We discuss implications for the regulation of dark trading and tick sizes.

DOI
10.1016/j.jfineco.2016.08.004
Volume
122
Issue
3
Pages
456-481
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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