Workshop Series: Carol Comerton-Forde
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 analyze 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.
Carole Comerton-Forde is a Professor of Finance at the Australian National University. Her research is in the area of market structure, with a focus on market liquidity and market integrity. Her work has been published in leading academic journals including the Journal of Finance and the Journal of Financial and Quantitative Analysis. Carole has previously held positions as an Associate Professor of Finance at the University of Sydney, a Visiting Associate Professor at New York University and a Visiting Economist at the New York Stock Exchange. She has also acted as a consultant for a number of stock exchanges and market regulators around the world. Carole was awarded a Bachelor of Commerce with first class honours in finance and a PhD in finance from the University of Sydney.