Should we be afraid of the dark? Dark trading and market quality

Sean Foley, Tālis J. Putniņš

Research output: Contribution to journalArticlepeer-review

47 Citations (Scopus)


We exploit a unique natural experiment—recent restrictions of dark trading in Canada and Australia—and proprietary trade-level data to analyze the effects of dark trading. Disaggregating two types of dark trading, we find that dark limit order markets are beneficial to market quality, reducing quoted, effective, and realized spreads and increasing informational efficiency. In contrast, we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality. Our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision. We discuss implications for the regulation of dark trading and tick sizes.
Original languageEnglish
Pages (from-to)456-481
Number of pages26
JournalJournal of Financial Economics
Issue number3
Publication statusPublished - Dec 2016
Externally publishedYes


  • Dark pool
  • Dark trading
  • Regulation
  • Market efficiency
  • Transparency
  • Liquidity


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