Shades of Trade: Dark Trading and Price Efficiency

Authors

Jared F. Egginton, Boise State UniversityFollow
Garrett A. McBrayer, Boise State UniversityFollow
Ethan D. Watson, University of North Carolina Wilmington

Document Type

Article

Publication Date

10-2023

Abstract

Using a comprehensive approach, we investigate how various forms of non-displayed order flow such as hidden orders on exchanges, brokerage internalizations, and orders submitted to off-exchange venues affects price efficiency. By considering the multiple forms of dark trading available to traders, we are able to better understand the nuances of dark trading, its impacts on price efficiency, and mitigate the unobserved variable problems present in studies that examine only one aspect of dark trading. We find that hidden orders on exchange have a deleterious impact on price efficiency. The impacts of other types of pre-trade, non-displayed orders on price efficiency is more nuanced.

Comments

Author Ethan D. Watson acknowledges funding from the University of North Carolina at Wilmington’s Summer Faculty Research Support Grant.

Publication Information

Egginton, Jared F.; McBrayer, Garrett A.; and Watson, Ethan D. (2023). "Shades of Trade: Dark Trading and Price Efficiency". Journal of Banking & Finance, 155, 107004. https://doi.org/10.1016/j.jbankfin.2023.107004