Post-MiFID II: Dark Pool Bans and Regulatory E ects on Lit Market Quality

Abstract

Over recent years, increasing popularity of non-transparent trading venues known as dark pools have spurred widespread controversy and debate; in particular regarding their impact on lit market conditions. Following voiced concerns over dark pools' potentially adverse e ects on lit market quality, legislative actions have been taken to restrict the amount of trading allowed to be conducted in the dark. Yet, previous empirical and theoretical literature on the subject is divided at large; with no clear consensus on the ultimate e ects of dark pool trading on lit markets|rendering regulatory scrutiny a priority. We leverage the cut-off in dark pool trading activ- ity following suspension of 35 securities in Nordic equity markets invoked by the Double Volume Cap rule trough the European MiFID II regulatory framework. We present evidence suggesting detrimental implementation effects of the ban on lit mar- ket liquidity|putting to question the justi ability of recent regulatory intervention. Conversely, other measures of liquidity and volatility appear una ected by the ban. The lack of clarity surrounding the fundamental implementation effects calls for fur- ther research in the field of dark pool trading and its ultimate effect on lit market quality. ii