Why do traders choose dark markets?

Ryan Garvey*, Tao Huang, Fei Wu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

13 Citations (Scopus)

Abstract

We examine U.S. equity trader use of dark and lit markets. Marketable orders executed in the dark have lower information content and smaller fill rates. Dark orders take longer to execute, but they execute at more favorable prices. Traders are more likely to go dark when the bid-ask spread is wider and those with higher dark participation are more sophisticated. Although market regulators have expressed concern over the rise in dark trading, our results indicate that dark markets provide important benefits to traders that lit markets do not.

Original languageEnglish
Pages (from-to)12-28
Number of pages17
JournalJournal of Banking and Finance
Volume68
DOIs
Publication statusPublished - 1 Jul 2016

Keywords

  • Dark pools
  • Order execution quality
  • Trading

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