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Volatility and dark trading: Evidence from the Covid-19 pandemic

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  • Ibikunle, Gbenga
  • Rzayev, Khaladdin

Abstract

We study the effect(s) of volatility on the share of trading in dark pools by exploiting the exogenous shock of the Covid-19 pandemic on financial markets and regulatory restrictions on dark trading. We find that high levels of volatility in lit exchanges is linked to an economically significant loss of market share by dark pools to lit exchanges. In line with the theory, the loss appears to be driven by informed traders’ migration from lit to dark markets during high volatility periods. The market quality implications of the trading dynamics are mixed: while it tempers liquidity decline in the lit market, it exacerbates the loss of informational efficiency.

Suggested Citation

  • Ibikunle, Gbenga & Rzayev, Khaladdin, 2023. "Volatility and dark trading: Evidence from the Covid-19 pandemic," The British Accounting Review, Elsevier, vol. 55(4).
    • Handle: RePEc:eee:bracre:v:55:y:2023:i:4:s0890838922001111
    DOI: 10.1016/j.bar.2022.101171
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    References listed on IDEAS

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    More about this item

    Keywords

    Covid-19; Dark pools; Venue selection; Liquidity; Market quality;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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