Dark matters: the effects of dark trading restrictions on liquidity and informational efficiency

Ibikunle, Gbenga; Li, Youwei; Mare, Davide; Sun, Yuxin

Abstract

We exploit the implementation of the double volume cap regulation introduced under the Markets in Financial Instruments Directive II in the European equity markets to investigate the impact of dark trading on liquidity and informational efficiency. We show that stocks subject to trading suspension in dark pools suffer a deterioration in liquidity compared to those that are not. The limiting of trading in dark pools also tends to reduce informational efficiency. Our results support recent theory arguing that dark pools encourage inter-venue order flow competition, underscoring the significance of dark trading for market quality.

Citation

Ibikunle, G., Li, Y., Mare, D., & Sun, Y. (2021). Dark matters: the effects of dark trading restrictions on liquidity and informational efficiency. Journal of International Financial Markets, Institutions and Money, 75, Article 101435. https://doi.org/10.1016/j.intfin.2021.101435

• Journal Article Type: Article
• Acceptance Date: Sep 26, 2021
• Online Publication Date: Oct 2, 2021
• Publication Date: Nov 1, 2021
• Deposit Date: Oct 4, 2021
• Publicly Available Date: Oct 3, 2022
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 75
• Article Number: 101435
• DOI: https://doi.org/10.1016/j.intfin.2021.101435
• Keywords: Dark trading; MiFID; Liquidity commonality; Double volume cap; Market efficiency
• Public URL: https://hull-repository.worktribe.com/output/3848801