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The Bright Side of Dark Markets: Experiments

Author

Listed:
  • Halim, Edward
  • Riyanto, Yohanes E.
  • Roy, Nilanjan
  • Wang, Yan

Abstract

We design an experiment to study the effects of dark trading on incentives to acquire costly information, price efficiency, market liquidity, and investors' earnings in a financial market. When the information precision is high, adding a dark pool alongside a lit exchange encourages information acquisition, crowds out liquidity from the lit market, and results in a non-linear relationship between price efficiency and dark pool participation. At modest levels, dark pools enhance information aggregation. Investors with stronger signals use the lit exchange relatively more, and uninformed traders are better off when they trade more in the dark pool.

Suggested Citation

  • Halim, Edward & Riyanto, Yohanes E. & Roy, Nilanjan & Wang, Yan, 2022. "The Bright Side of Dark Markets: Experiments," MPRA Paper 111803, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:111803
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    File URL: https://mpra.ub.uni-muenchen.de/111803/1/MPRA_paper_111803.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Market institutions; dark pools; information aggregation; the efficiency of security markets; costly information acquisition; experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • 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

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