Informational Linkages Between Dark and Lit Trading Venues

Abstract

We examine the linkages between dark and lit venues using a proprietary data set. We find that algorithmic trades for less liquid stocks lead to higher spreads and price impact, and correlated trading on the lit venues. Also, signed trades for these stocks predict future returns over the next 15 to 120 minutes. Trades for liquid stocks, trades by the dark venue brokerage desk, and members trading large blocks in negotiated crosses transmit less information to the lit venues. The results suggest that dark venues allow informed agents to trade strategically on both venues and facilitate the price discovery process.

Keywords: Crossing networks, algorithmic trading, price discovery, information trasmission

JEL Classification: D53, G12, G28