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Shades of Darkness: A Pecking Order of Trading Venues

Author

Listed:
  • Haoxiang Zhu

    (MIT)

  • Bart Yueshen

    (INSEAD)

  • Albert Menkveld

    (VU University Amsterdam)

Abstract

Investors trade in various types of venues. When demanding immediacy, they trade off price impact and execution uncertainty. The 'pecking order' hypothesis (POH) states that investors rank venues accordingly, with low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint pools in the middle, and lit markets at the bottom. When urgency increases, investors tilt their flow from top to bottom. We document such pattern for U.S. data, confirming POH. A simple model obtains POH in equilibrium and suggests that the availability of dark pools reduces investor (utility) cost by $1.43 billion annually.

Suggested Citation

  • Haoxiang Zhu & Bart Yueshen & Albert Menkveld, 2015. "Shades of Darkness: A Pecking Order of Trading Venues," 2015 Meeting Papers 1164, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1164
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    References listed on IDEAS

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    More about this item

    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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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