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Does the bid–ask spread affect trading in exchange operated dark pools? Evidence from a natural experiment

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  • Duong, Huu Nhan
  • Kalev, Petko S.
  • Tian, Xiao Jason

Abstract

We exploit exogenous reductions in the minimum tick size to examine the effect of the bid–ask spread in the lit market on dark trading activity in the exchange operated dark pool in Japan. Stocks affected by the minimum tick size experience a decline in the share of trading in the exchange operated dark pool. The decrease in the share of dark trading is mostly evident among stocks with a constrained tick size prior to the tick size changes. Overall, our findings imply that reducing the minimum tick size can help lit venues regain market shares over dark venues.

Suggested Citation

  • Duong, Huu Nhan & Kalev, Petko S. & Tian, Xiao Jason, 2022. "Does the bid–ask spread affect trading in exchange operated dark pools? Evidence from a natural experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:dyncon:v:139:y:2022:i:c:s0165188922001415
    DOI: 10.1016/j.jedc.2022.104436
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    Cited by:

    1. Duong, Huu Nhan & Kalev, Petko S. & Tian, Xiao, 2023. "Short selling, divergence of opinion and volatility in the corporate bond market," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    Dark trading; Exchange operated dark pool; Tick size change; Bid–ask spread; Japanese market;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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