Seminar by Dr Carole Comerton-Forde
- Topic: Dark trading and price discovery
- Speaker: Dr Carole Comerton-Forde, Professor of Finance, ANU College of Business and Economics
- When: 17th August, 2012, (Fri)
Regulators and stock exchanges around the world are concerned that growth in the share of equities volume executed without pre-trade transparency, so called 'dark trading', may harm price discovery. We empirically analyse the impact of dark trading on price discovery. We find that aggregate price discovery is impeded and prices become less informationally efficient as order flow migrates away from transparent exchanges. Order flow that migrates to the dark is less informed than that which is left behind, but it is not entirely uninformed. Therefore, the loss of pre-trade information on migrating order flow harms price discovery. It also increases adverse selection risk, bid-ask spreads and price impact in the transparent exchange. This decreases the incentives to engage in costly information acquisition, thereby further reducing the informational efficiency of prices. We find no evidence that large block trades that occur in the dark impede price discovery.