Dark matters: the effects of dark trading restrictions on liquidity and informational efficiency

We exploit the implementation of the double volume cap regulation introduced under the Markets in Financial Instruments Directive II in the European equity markets to investigate the impact of dark trading on liquidity and informational efficiency. We show that stocks subject to trading suspension in dark pools suffer a deterioration in liquidity compared to those that are not. The limiting of trading in dark pools also tends to reduce informational efficiency. Our results support recent theory arguing that dark pools encourage inter-venue order flow competition, underscoring the significance of dark trading for market quality