Shades of darkness: A pecking order of trading venues

Abstract

Investors trade in various types of venues. When demanding immediacy they face a basic tradeoff between price impact and execution uncertainty. Venues can be sorted accordingly along a "pecking order," with mid-point dark pools and lit markets at the top and bottom, and non-midpoint pools in the middle. A simple model formalizes this pecking order hypothesis. We test it using a unique dataset that disaggregates U.S. dark trading into various categories. A higher VIX or larger earnings surprise tilts trading volumes from the top of the pecking order to the bottom, confirming the hypothesis.

Quasi-Dark Trading: The Effects of Banning Dark Pools in a World of Many Alternatives

“…Harris (1993) however argues that a fragmented market can emerge in equilibrium as heterogeneous agents optimize their venues choices based on their need for anonymity, immediacy, and transparency. Theories of dark pool trading such as Hendershott and Mendelson (2000), Zhu (2014), Buti, Rindi, and Werner (2017), Ye (2011), Brolley (2016), and Menkveld, Yueshen, and Zhu (2017) derive equilibrium strategies for heterogeneously informed investors as a function of the execution probability in dark pools (typically vis-à-vis lit markets), the price improvement offered by dark pools, the type of information traders possess (short-term versus long-term), and other agents' (typically uninformed and/or noise traders) strategies.…”

Price and Size Discovery in Financial Markets: Evidence from the U.S. Treasury Securities Market

“…Our study of the Treasury size discovery mechanism and its role in price discovery is a timely addition to this literature and provides important evidence for furthering theoretical work in this area, especially given that the data needed to study size discovery mechanisms in other markets are not easily accessible. Moreover, to the extent that workups share some common features of a dark pool, we contribute evidence from the bond market to the equity-heavy empirical literature on dark pools and hidden liquidity (see e.g., Bessembinder, Panayides, and Venkataraman, 2009;Ready, 2012;Comerton-Forde and Putnins, 2015;Menkveld, Zhu, and Yueshen, 2017).…”

Dark pools et trading haute fréquence : une évolution utile ?

“…Ce type de dark pools est d'abord exclusivement dédié et réservé aux besoins des investisseurs institutionnels souhaitant échanger en tout anonymat de larges montants (blocs de titres). Le marché principal réglementé sur lequel l'entreprise s'est introduite demeure un lieu d'échanges actif des investisseurs institutionnels en raison de la liquidité immédiatement disponible, mais il fournit désormais la liquidité en dernier ressort étant donné sa cherté (Menkveld et al, 2015). Chaque transaction effectuée sur un marché réglementé transparent est notamment soumise à une commission (exchange fees), qui est évitée si la transaction a lieu hors du marché réglementé.…”