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Dark matters: The effects of dark trading restrictions on liquidity and informational efficiency

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  • Ibikunle, Gbenga
  • Li, Youwei
  • Mare, Davide
  • Sun, Yuxin

Abstract

We exploit the implementation of the double volume cap regulation introduced under the Markets in Financial Instruments Directive II in the European equity markets to investigate the impact of dark trading on liquidity and informational efficiency. We show that stocks subject to trading suspension in dark pools suffer a deterioration in liquidity compared to those that are not. The limiting of trading in dark pools also tends to reduce informational efficiency. Our results support recent theory arguing that dark pools encourage inter-venue order flow competition, underscoring the significance of dark trading for market quality.

Suggested Citation

  • Ibikunle, Gbenga & Li, Youwei & Mare, Davide & Sun, Yuxin, 2021. "Dark matters: The effects of dark trading restrictions on liquidity and informational efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:intfin:v:75:y:2021:i:c:s1042443121001487
    DOI: 10.1016/j.intfin.2021.101435
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    Cited by:

    1. Zhang, Zeyu & Ibikunle, Gbenga, 2023. "The market quality effects of sub-second frequent batch auctions: Evidence from dark trading restrictions," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Ibikunle, Gbenga & Rzayev, Khaladdin, 2023. "Volatility and dark trading: Evidence from the Covid-19 pandemic," The British Accounting Review, Elsevier, vol. 55(4).

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    More about this item

    Keywords

    Dark trading; MiFID; Liquidity commonality; Double volume cap; Market efficiency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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