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Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision

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  • Robert P. Bartlett, III
  • Justin McCrary

Abstract

Using over eight trillion observations of market data, we use a regression discontinuity design to analyze the effect of increasing the minimum price variation (MPV) for quoting equity securities in light of recent proposals to increase the MPV from $0.01 to $0.05. We show that a larger MPV encourages investors to trade in dark venues at the midpoint of the national best bid and offer. Enhanced order flow to dark venues reduces price competition by exchange liquidity providers, especially those using high frequency trading (HFT). Trading in dark venues due to a wider MPV reduces volatility and increases trading volume.

Suggested Citation

  • Robert P. Bartlett, III & Justin McCrary, 2015. "Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision," NBER Working Papers 21286, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21286
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    Cited by:

    1. Grimstvedt Meling, Tom & Ødegård, Bernt Arne, 2017. "Tick Size Wars, High Frequency Trading, and Market Quality," Working Papers in Economics 5/17, University of Bergen, Department of Economics.
    2. Meling, Tom Grimstvedt & Odegaard, Bernt Arne, 2016. "Tick Size Wars," UiS Working Papers in Economics and Finance 2016/15, University of Stavanger.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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