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Two shades of opacity: Hidden orders and dark trading

Author

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  • Degryse, Hans
  • Karagiannis, Nikolaos
  • Tombeur, Geoffrey
  • Wuyts, Gunther

Abstract

Regulators are concerned that large volumes of trading outside lit venues (i.e., dark trading) harms the functioning of financial markets. In contrast, regulators are neutral about hidden-order trading as these occur on lit venues and are associated with positive effects on market quality. An unanswered economic question concerns the interrelation between these two types of opaque trading, i.e., hidden orders and dark trading. Employing two different empirical methodologies we find that dark and hidden-order trading are substitutes. We also show that both types of opaque trading increase when markets are volatile and fewer algorithmic trading occurs. Smart order routing increases dark trading but reduces hidden-order activity.

Suggested Citation

  • Degryse, Hans & Karagiannis, Nikolaos & Tombeur, Geoffrey & Wuyts, Gunther, 2021. "Two shades of opacity: Hidden orders and dark trading," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    • Handle: RePEc:eee:jfinin:v:47:y:2021:i:c:s1042957321000206
    DOI: 10.1016/j.jfi.2021.100919
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    References listed on IDEAS

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    Cited by:

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    2. Justin Cox & Bonnie Van Ness & Robert Van Ness, 2022. "The dark side of IPOs: Examining where and who trades in the IPO secondary market," Financial Management, Financial Management Association International, vol. 51(4), pages 1091-1126, December.
    3. Ibikunle, Gbenga & Rzayev, Khaladdin, 2023. "Volatility and dark trading: Evidence from the Covid-19 pandemic," The British Accounting Review, Elsevier, vol. 55(4).
    4. Neumeier, Christian & Gozluklu, Arie & Hoffmann, Peter & O’Neill, Peter & Suntheim, Felix, 2023. "Banning dark pools: Venue selection and investor trading costs," Journal of Financial Markets, Elsevier, vol. 65(C).
    5. Cox, Justin S., 2022. "The impact of reporting changes on hidden liquidity: Evidence from the Chicago stock exchange," Global Finance Journal, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    Dark trading; Hidden orders; Dark pools; OTC Trading; Opacity; Transparency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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