Dark Trading Regulations and Options Market Liquidity: Evidence from the Canadian Market

33 Pages Posted: 3 Feb 2020

See all articles by Andrew Lepone

Andrew Lepone

Macquarie University, Macquarie Business School

Jun Wen

Macquarie University - Macquarie Graduate School of Management

Jin Young Yang

Inha University

Date Written: January 10, 2020

Abstract

This study investigates the impact of dark equity trading regulatory restrictions on the options market liquidity in Canada. In late 2012, the Canadian market regulator introduced a new dark trading regulation, referred to as the “Minimum Price Improvement” (“MPI”). It requires dark orders to provide at least one full tick size of price improvement relative to the prevailing best bid and ask price in the lit equity market. This study finds evidence that dark equity trading regulation imposes a mixed effect on the options market makers’ behaviour, therefore affecting options market liquidity. Specifically, both call and put options markets become less liquid, in terms of relative bid-ask spreads, under the new rule. In contrast, the size of market depth at the best bid and ask quote increases. Traders in call options market also face a higher level of execution costs after the regulatory change.

Keywords: Dark Trading; Options Market Maker; Options Market Liquidity

Suggested Citation

Lepone, Andrew and Wen, Jun and Yang, Jin Young, Dark Trading Regulations and Options Market Liquidity: Evidence from the Canadian Market (January 10, 2020). Available at SSRN: https://ssrn.com/abstract=3517226 or http://dx.doi.org/10.2139/ssrn.3517226

Andrew Lepone

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Jun Wen

Macquarie University - Macquarie Graduate School of Management ( email )

Australia

Jin Young Yang (Contact Author)

Inha University ( email )

Incheon
Korea, Republic of (South Korea)

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