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Shades of darkness: A pecking order of trading venues

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  • Menkveld, Albert J.
  • Yueshen, Bart Zhou
  • Zhu, Haoxiang

Abstract

We characterize the dynamic fragmentation of U.S. equity markets using a unique data set that disaggregates dark transactions by venue types. The “pecking order” hypothesis of trading venues states that investors “sort” various venue types, putting low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint dark pools in the middle, and lit markets at the bottom. As predicted, following VIX shocks, macroeconomic news, and firms’ earnings surprises, changes in venue market shares become progressively more positive (or less negative) down the pecking order. We further document heterogeneity across dark venue types and stock size groups.

Suggested Citation

  • Menkveld, Albert J. & Yueshen, Bart Zhou & Zhu, Haoxiang, 2017. "Shades of darkness: A pecking order of trading venues," Journal of Financial Economics, Elsevier, vol. 124(3), pages 503-534.
    • Handle: RePEc:eee:jfinec:v:124:y:2017:i:3:p:503-534
    DOI: 10.1016/j.jfineco.2017.03.004
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    More about this item

    Keywords

    Dark pool; Pecking order; Fragmentation;
    All these keywords.

    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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