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Dark trading and price discovery

Author

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  • Comerton-Forde, Carole
  • Putniņš, Tālis J.

Abstract

Regulators globally are concerned that dark trading harms price discovery. We show that dark trades are less informed than lit trades. High levels of dark trading increase adverse selection risk on the lit exchange by increasing the concentration of informed traders. Using both high- and low-frequency measures of informational efficiency we find that low levels of non-block dark trading are benign or even beneficial for informational efficiency, but high levels are harmful. In contrast, we find no evidence that block trades in the dark impede price discovery.

Suggested Citation

  • Comerton-Forde, Carole & Putniņš, Tālis J., 2015. "Dark trading and price discovery," Journal of Financial Economics, Elsevier, vol. 118(1), pages 70-92.
    • Handle: RePEc:eee:jfinec:v:118:y:2015:i:1:p:70-92
    DOI: 10.1016/j.jfineco.2015.06.013
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    More about this item

    Keywords

    Dark pool; Price discovery; Efficiency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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