IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-01860709.html
   My bibliography  Save this paper

Fifty-shades of grey: competition between dark and lit pools in stock exchanges

Author

Listed:
  • Nathalie Oriol

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • Alexandra Rufini

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • Dominique Torre

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

Abstract

Debate on financial market fragmentation has been revived by the rise of dark pools. Our theoretical setting analyzes the interaction between single-homing heterogeneous investors and trading services providers in the presence of market externalities. We compare different forms of regulated exchanges challenged by Over-The-Counter (OTC) facilities: a consolidated trading organization involving only one market firm, and fragmented ex-changes involving spatially differentiated platforms including lit and dark pools competing for order flows. By capturing OTC users, dark trading can enhance market externalities and market stakeholders' welfare. This result contributes to the ongoing regulatory debate on market structure regulation.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Nathalie Oriol & Alexandra Rufini & Dominique Torre, 2018. "Fifty-shades of grey: competition between dark and lit pools in stock exchanges," Post-Print halshs-01860709, HAL.
    • Handle: RePEc:hal:journl:halshs-01860709
    DOI: 10.1016/j.infoecopol.2018.08.001
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 195-209.
    2. Cantillon, Estelle & Yin, Pai-Ling, 2011. "Competition between exchanges: A research agenda," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 329-336, May.
    3. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
    4. Peter Gomber & Satchit Sagade & Erik Theissen & Moritz Christian Weber & Christian Westheide, 2017. "Competition Between Equity Markets: A Review Of The Consolidation Versus Fragmentation Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 792-814, July.
    5. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    6. Linlin Ye, 2016. "Understanding the Impacts of Dark Pools on Price Discovery," Papers 1612.08486, arXiv.org.
    7. Matutes, Carmen & Padilla, A. Jorge, 1994. "Shared ATM networks and banking competition," European Economic Review, Elsevier, vol. 38(5), pages 1113-1138, May.
    8. Gehrig, Thomas, 1996. "Natural oligopoly and customer networks in intermediated markets," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 101-118.
    9. Economides, Nicholas & Tåg, Joacim, 2012. "Network neutrality on the Internet: A two-sided market analysis," Information Economics and Policy, Elsevier, vol. 24(2), pages 91-104.
    10. Pirrong, Craig, 1999. "The organization of financial exchange markets: Theory and evidence," Journal of Financial Markets, Elsevier, vol. 2(4), pages 329-357, November.
    11. Hans Degryse & Frank de Jong & Vincent van Kervel, 2015. "The Impact of Dark Trading and Visible Fragmentation on Market Quality," Review of Finance, European Finance Association, vol. 19(4), pages 1587-1622.
    12. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    13. Jean-Edouard Colliard & Thierry Foucault, 2012. "Trading Fees and Efficiency in Limit Order Markets," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3389-3421.
    14. Hans Christiansen & Alissa Koldertsova, 2009. "The role of stock exchanges in corporate governance," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2009(1), pages 209-238.
    15. Paul Belleflamme & Martin Peitz, 2018. "Platforms and network effects," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 11, pages 286-317, Edward Elgar Publishing.
    16. Gresse, Carole, 2017. "Effects of lit and dark market fragmentation on liquidity," Journal of Financial Markets, Elsevier, vol. 35(C), pages 1-20.
    17. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
    18. Josanco Floreani & Maurizio Polato, 2014. "The Economics of the Global Stock Exchange Industry," Palgrave Macmillan Studies in Banking and Financial Institutions, Palgrave Macmillan, number 978-1-137-32183-1, February.
    19. Marco Pagano, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 255-274.
    20. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    21. Hasbrouck, Joel, 1995. "One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-1199, September.
    22. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-481.
    23. repec:oup:rfinst:v:25:y::i:11:p:3389-3421 is not listed on IDEAS
    24. Jean-Edouard Colliard & Thierry Foucault, 2012. "Trading Fees and Efficiency in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3389-3421.
    25. Levine, Ross, 1991. "Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-1465, September.
    26. Haoxiang Zhu, 2014. "Do Dark Pools Harm Price Discovery?," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 747-789.
    27. Carole Gresse, 2017. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print hal-01631771, HAL.
    28. Chowdhry, Bhagwan & Nanda, Vikram, 1991. "Multimarket Trading and Market Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 483-511.
    29. Booth, G. Geoffrey & Gurun, Umit G. & Zhang, Harold, 2014. "Financial networks and trading in bond markets," Journal of Financial Markets, Elsevier, vol. 18(C), pages 126-157.
    30. Mendelson, Haim, 1987. "Consolidation, Fragmentation, and Market Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 189-207, June.
    31. Kaas, Leo, 2004. "Financial market integration and loan competition: when is entry deregulation socially beneficial?," Working Paper Series 403, European Central Bank.
    32. Domowitz, Ian, 1995. "Electronic derivatives exchanges: Implicit mergers, network externalities, and standardization," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 163-175.
    33. Petrescu, Monica & Wedow, Michael, 2017. "Dark pools in European equity markets: emergence, competition and implications," Occasional Paper Series 193, European Central Bank.
    34. Carole Gresse, 2012. "Market fragmentation in Europe: Assessment and prospects for market quality," Post-Print halshs-00959685, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ibikunle, Gbenga & Rzayev, Khaladdin, 2023. "Volatility and dark trading: Evidence from the Covid-19 pandemic," The British Accounting Review, Elsevier, vol. 55(4).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Chen & Darrell Duffie, 2021. "Market Fragmentation," American Economic Review, American Economic Association, vol. 111(7), pages 2247-2274, July.
    2. Bernales, Alejandro & Garrido, Nicolás & Sagade, Satchit & Valenzuela, Marcela & Westheide, Christian, 2020. "Trader Competition in Fragmented Markets: Liquidity Supply versus Picking-off Risk," SAFE Working Paper Series 234, Leibniz Institute for Financial Research SAFE, revised 2020.
    3. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    4. Peter Gomber & Satchit Sagade & Erik Theissen & Moritz Christian Weber & Christian Westheide, 2017. "Competition Between Equity Markets: A Review Of The Consolidation Versus Fragmentation Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 792-814, July.
    5. Clapham, Benjamin & Gomber, Peter & Lausen, Jens & Panz, Sven, 2018. "Liquidity provider incentives in fragmented securities markets," SAFE Working Paper Series 231, Leibniz Institute for Financial Research SAFE.
    6. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    7. Justin Cox, 2020. "Market fragmentation and post-earnings announcement drift," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(3), pages 587-610, July.
    8. Gbenga Ibikunle & Davide Mare & Yuxin Sun, 2020. "The paradoxical effects of market fragmentation on adverse selection risk and market efficiency," The European Journal of Finance, Taylor & Francis Journals, vol. 26(14), pages 1439-1461, September.
    9. Pierre-Cyrille Hautcoeur & Amir Rezaee & Angelo Riva, 2023. "Competition between securities markets: stock exchange industry regulation in the Paris financial center at the turn of the twentieth century," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 17(2), pages 261-299, May.
    10. Hatheway, Frank & Kwan, Amy & Zheng, Hui, 2017. "An Empirical Analysis of Market Segmentation on U.S. Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2399-2427, December.
    11. Kobana Abukari & Isaac Otchere, 2020. "Has stock exchange demutualization improved market quality? International evidence," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 901-934, October.
    12. Bayona, Anna & Dumitrescu, Ariadna & Manzano, Carolina, 2023. "Information and optimal trading strategies with dark pools," Economic Modelling, Elsevier, vol. 126(C).
    13. Clapham, Benjamin & Gomber, Peter & Lausen, Jens & Panz, Sven, 2021. "Liquidity provider incentives in fragmented securities markets," Journal of Empirical Finance, Elsevier, vol. 60(C), pages 16-38.
    14. Ligot, Stephanie & Gillet, Roland & Veryzhenko, Iryna, 2021. "Intraday volatility smile: Effects of fragmentation and high frequency trading on price efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    15. Degryse, H.A., 2007. "Competition on financial markets : Does market design matter?," Other publications TiSEM ee5530b2-34f7-4d95-ad62-f, Tilburg University, School of Economics and Management.
    16. Comerton-Forde, Carole & Putniņš, Tālis J., 2015. "Dark trading and price discovery," Journal of Financial Economics, Elsevier, vol. 118(1), pages 70-92.
    17. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2023. "Spoilt for choice: Determinants of market shares in fragmented equity markets," Journal of Financial Markets, Elsevier, vol. 64(C).
    18. Markus Baldauf & Joshua Mollner, 2015. "Trading in Fragmented Markets," Discussion Papers 15-018, Stanford Institute for Economic Policy Research.
    19. Anna Pomeranets & Daniel G. Weaver, 2024. "Forced consolidation," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 579-601, February.
    20. John Board & Charles Sutcliffe & Stephen Wells, 2002. "Transparency and Fragmentation," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-4039-0707-3.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-01860709. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.