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Quasi-dark trading: The effects of banning dark pools in a world of many alternatives

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  • Johann, Thomas
  • Putnins, Talis
  • Sagade, Satchit
  • Westheide, Christian

Abstract

We show that "quasi-dark" trading venues, i.e., markets with somewhat non-transparent trading mechanisms, are important parts of modern equity market structure alongside lit markets and dark pools. Using the European MiFID II regulation as a quasi-natural experiment, we find that dark pool bans lead to (i) volume spill-overs into quasi-dark trading mechanisms including periodic auctions and order internalization systems; (ii) little volume returning to transparent public markets; and consequently, (iii) a negligible impact on market liquidity and short-term price efficiency. These results show that quasi-dark markets serve as close substitutes for dark pools and consequently mitigate the effectiveness of dark pool regulation. Our findings highlight the need for a broader approach to transparency regulation in modern markets that takes into consideration the many alternative forms of quasi-dark trading.

Suggested Citation

  • Johann, Thomas & Putnins, Talis & Sagade, Satchit & Westheide, Christian, 2019. "Quasi-dark trading: The effects of banning dark pools in a world of many alternatives," SAFE Working Paper Series 253, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:253
    DOI: 10.2139/ssrn.3365994
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Samuel Antill & Darrell Duffie, 2021. "Augmenting Markets with Mechanisms [Optimal Execution of Portfolio Transactions]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(4), pages 1665-1719.
    2. Lang, Mark & Pinto, Jedson & Sul, Edward, 2024. "MiFID II unbundling and sell-side analyst research," Journal of Accounting and Economics, Elsevier, vol. 77(1).
    3. Marta Khomyn, 2020. "Essays on Modern Market Structure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2020, January-A.
    4. Paul J. Irvine & Egle Karmaziene, 2023. "Competing for Dark Trades," Tinbergen Institute Discussion Papers 23-020/IV, Tinbergen Institute.
    5. Ibikunle, Gbenga & Li, Youwei & Mare, Davide & Sun, Yuxin, 2021. "Dark matters: The effects of dark trading restrictions on liquidity and informational efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    6. 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).
    7. Zhang, Zeyu & Ibikunle, Gbenga, 2023. "The market quality effects of sub-second frequent batch auctions: Evidence from dark trading restrictions," International Review of Financial Analysis, Elsevier, vol. 89(C).
    8. Mike Derksen & Bas Kleijn & Robin de Vilder, 2020. "Effects of MiFID II on stock price formation," Papers 2003.10353, arXiv.org, revised Aug 2020.
    9. Bassi, Ugo & Rookhuijzen, Martijn, 2023. "MiFIR review: The right balance," Journal of Securities Operations & Custody, Henry Stewart Publications, vol. 15(4), pages 291-303, September.
    10. 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).

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    More about this item

    Keywords

    Dark Pools; Dark Trading; Liquidity; Price Efficiency; MiFID II; Double VolumeCaps;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

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