Informational Linkages Between Dark and Lit Trading Venues

Abstract We examine the linkages between dark and lit venues using a proprietary data set. We find that algorithmic trades for less liquid stocks are correlated with higher spreads and price impact, as well as contemporaneous trading on the lit venues. Also, signed trades for these stocks predict future returns over the next 15–120 minutes. Trades for liquid stocks, trades by the dark venue brokerage desk, and trades of large blocks transmit less information to lit venues. The results suggest informed agents split orders using algorithms across dark and lit trading venues, with lit orders providing some price discovery.