The investment effects of dark trading

Abstract

Almost half of trading volume in the United States occurs in dark markets, prompting regulatory concerns. We examine the effects of dark trading on issuers and show that, at moderate levels, dark trading improves the quality of corporate investment decisions by increasing the amount of information in prices that is new to managers. Consistent with this mechanism, higher dark trading is associated with greater investment–to–price sensitivity, improved managerial forecast accuracy, stronger M&A-price sensitivity, and superior future operating performance. These benefits diminish, and can reverse, at high levels of dark trading. We establish causality using exogenous changes in dark trading.