Dark Pool Trading and Information Acquisition

Theory suggests that dark pools may facilitate or discourage information acquisition. We find that more dark pool trading leads to greater information acquisition. We measure information acquisition using stock price dynamics around earnings announcements. To overcome endogeneity concerns, we exploit a large exogenous decrease to dark pool trading that results from the implementation of the Security and Exchange Commission’s (SEC’s) Tick Size Pilot Program. The results cannot be explained by lit venue liquidity, algorithmic trading, or informational efficiency. A battery of additional tests, such as documenting a shift in SEC EDGAR searches, supports the information acquisition interpretation.

Part IV Market Institutions And International Capital Markets, 11 Stock Exchanges—An Endangered Species

This chapter explores stock exchanges, which are the most visible and vocal among capital market institutions. Despite the waves of demutualization and consolidation, exchanges remain idiosyncratic institutions. Even where similar structural reorganizations have occurred, the underlying factors prompting such moves, and potentially the on-going operations of the exchanges, are often quite different. As capital markets grew in importance, the role of exchanges extended beyond that of a trading venue. The modern exchange also serves political masters, acting as a national symbol in some cases, and thus eliciting regulatory responses not based on market considerations alone. More importantly, exchanges are imbued, implicitly or explicitly, with a ‘public interest’ due to their impact on the related issues of economic growth, systemic financial stability, and investor protection. The chapter then considers high frequency trading, which drove institutional investors off the exchanges and into the ‘dark pools’, creating concerns over exchange liquidity, transparency, and price-discovery.

Dark pools and data markets: an exploration of the regulatory challenges

Regulating the data market is shaping up to be one of the major challenges of the twenty-first century. In order to think about regulating this market, however, we first need to make its dimensions and dynamics more accessible to research. In this paper we explore what the state of the sociological and legal research on markets can tell us about the market for data: what kind of market it is, the practices and configurations of actors that constitute it, and what kinds of data are traded there. We start from the subjective opacity of this market to researchers interested in regulation, using ‘dark pools’ as a point of reference for the challenges of understanding how data are traded and channelled. We explore comparisons from food and medicine regulation to understand how these markets have been shaped and the different aims that have been taken into account in doing so, and discuss the implications of these explorations for the future regulation of data markets.

Short selling and dark pool volume

PurposePrior research posits that traders with short-lived information favor lit exchanges over dark pools due to execution certainty. This paper aims to focus on the relation between informed trading based on firm fundamentals and dark pool volume because the preferred venue for traders with longer-lived information is less certain.Design/methodology/approachThe authors examine the effect of short interest, a proxy for informed traders with long-lived information, on dark pool volume using fixed effects, first difference and instrumental variable approaches. They examine the effect of dark pools on the profitability of long-lived information using market- and characteristic-adjusted returns.FindingsThe proportion of trading volume executed in dark pools is positively correlated with short interest. This result is stronger for stocks that suffer from greater uncertainty and stocks targeted by transient institutional investors. Short sellers profit substantially from their information as subsequent returns are lower for heavily shorted stocks with greater dark pool volume.Research limitations/implicationsIn 2014, the Financial Industry Regulatory Authority began making trading data available for dark pools. Before that, only limited information was publicly available. The authors use that data to shed more light on dark pools activity.Practical implicationsThe evidence presented in the paper helps inform the current discussion about the role and regulation of dark pools.Originality/valueThis is the first study to show that informed traders with long-lived information favor dark pools due to their opacity and the possibility of price improvement.

Shorting in Broad Daylight: Short Sales and Venue Choice

Using a novel database on venue short sales and market design characteristics, we ask: Where do short sellers exploit their information advantage? Consistent with the prediction of Zhu (2014), we find that exchange short sales comprise a larger proportion of trading and are more informative about future prices than dark-pool short sales, particularly when there is greater competition among short sellers to trade and in the presence of short-lived information. When examining market design characteristics, we find that dark pools offering volume-weighted average price crossing attract more short sales, whereas those offering block trading attract fewer short sales.