Dark Trading and Price Discovery

54 Pages Posted: 2 Dec 2012 Last revised: 26 Jun 2015

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: February 13, 2015


Regulators globally are concerned that dark trading harms price discovery. We show that dark trades are less informed than lit trades. High levels of dark trading increase adverse selection risk on the lit exchange by increasing the concentration of informed traders. Using both high- and low-frequency measures of informational efficiency we find that low levels of non-block dark trading are benign or even beneficial for informational efficiency, but high levels are harmful. In contrast, we find no evidence that block trades in the dark impede price discovery.

Keywords: dark pool, price discovery, information share, efficiency

JEL Classification: G14

Suggested Citation

Comerton-Forde, Carole and Putnins, Talis J., Dark Trading and Price Discovery (February 13, 2015). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2183392 or http://dx.doi.org/10.2139/ssrn.2183392

Carole Comerton-Forde (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

HOME PAGE: http://www.firn.org.au

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
+371 67015841 (Phone)

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