Regulating dark trading: Order flow segmentation and market quality

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. Interme...

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Veröffentlicht in:Journal of financial economics 2018-11, Vol.130 (2), p.347-366
Hauptverfasser: Comerton-Forde, Carole, Malinova, Katya, Park, Andreas
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2018.07.002