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Regulating dark trading: Order flow segmentation and market quality

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  • Comerton-Forde, Carole
  • Malinova, Katya
  • Park, Andreas

Abstract

We examine the impact of a rule in the Canadian equities market that requires dark orders to offer price improvement over displayed orders. We show that this rule eliminated intermediation of retail orders in the dark and shifted retail orders onto the lit market with the lowest trading fee. Intermediaries shifted liquidity supply to this market leading to increased displayed liquidity. We conclude that reducing retail order segmentation enhances lit liquidity. Despite the improvement in liquidity, retail traders receive less price improvement. Retail brokers pay higher trading fees to exchanges, and high-frequency traders earn higher revenues from trading fees.

Suggested Citation

  • Comerton-Forde, Carole & Malinova, Katya & Park, Andreas, 2018. "Regulating dark trading: Order flow segmentation and market quality," Journal of Financial Economics, Elsevier, vol. 130(2), pages 347-366.
    • Handle: RePEc:eee:jfinec:v:130:y:2018:i:2:p:347-366
    DOI: 10.1016/j.jfineco.2018.07.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Dark trading; Trade-at rule; Price improvement; Segmentation; Retail internalization;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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