Pinging and Market Impact
Hidden Liquidity and Market Quality
According to Putnins and Comerton-Forde (2012), regulators and stock exchanges around the world have expressed concerns that growth in the share of equities volume executed in venues with little or no pre-trade transparency, so called ‘dark pools’, may harm market quality.
Orders are hidden primarily in an attempt to reduce information leakage as well as price movements and order flows caused by substantial changes in a stock’s supply (market impact). Although off-exchange trading and internalization of order flow by brokers has been occurring for decades, recent years have seen a large number of organized dark trading venues emerge around the world and acquire a considerable share of trading volume (Putnins and Comerton Forde, 2012).
This evolution to dark trading, Bloomfield, O’Hara and Saar assert, has gained momentum in recent years driven by competitive pressures from new exchanges and trading platforms, resulting in an overall increase in fragmentation. Degryse, Jong and Kervel (2011) distinguish between two types of fragmentation: That between visible order books (aptly designated ‘visible fragmentation’ by the authors) and that between visible order books and those with no pre-trade transparency. They find that the effect of fragmentation on liquidity (measured by depth levels), a key component of market quality, is negative, but only for the fragmentation between visible and dark order books. Specifically, they find that an increase in dark trading of one standard deviation lowers liquidity by 9%.
Pinging
If orders are hidden to prevent information leakage, then dark pool liquidity may be predictive of future price moves. Therefore knowledge of dark pool liquidity is valuable. An interesting aspect behind hidden orders is that they can be placed inside of the bid-ask spread (aggressive orders are orders that are placed within the spread) without affecting visible best ask and bid quotes. This mechanism
According to Putnins and Comerton-Forde (2012), regulators and stock exchanges around the world have expressed concerns that growth in the share of equities volume executed in venues with little or no pre-trade transparency, so called ‘dark pools’, may harm market quality.
Orders are hidden primarily in an attempt to reduce information leakage as well as price movements and order flows caused by substantial changes in a stock’s supply (market impact). Although off-exchange trading and internalization of order flow by brokers has been occurring for decades, recent years have seen a large number of organized dark trading venues emerge around the world and acquire a considerable share of trading volume (Putnins and Comerton Forde, 2012).
This evolution to dark trading, Bloomfield, O’Hara and Saar assert, has gained momentum in recent years driven by competitive pressures from new exchanges and trading platforms, resulting in an overall increase in fragmentation. Degryse, Jong and Kervel (2011) distinguish between two types of fragmentation: That between visible order books (aptly designated ‘visible fragmentation’ by the authors) and that between visible order books and those with no pre-trade transparency. They find that the effect of fragmentation on liquidity (measured by depth levels), a key component of market quality, is negative, but only for the fragmentation between visible and dark order books. Specifically, they find that an increase in dark trading of one standard deviation lowers liquidity by 9%.
Pinging
If orders are hidden to prevent information leakage, then dark pool liquidity may be predictive of future price moves. Therefore knowledge of dark pool liquidity is valuable. An interesting aspect behind hidden orders is that they can be placed inside of the bid-ask spread (aggressive orders are orders that are placed within the spread) without affecting visible best ask and bid quotes. This mechanism