How Dark Trading Harms Financial Markets

Edward Halim; Yohanes E. Riyanto; Nilanjan Roy; Yan Wang

doi:10.1093/ej/ueaf007

How Dark Trading Harms Financial Markets

Edward Halim, Yohanes E. Riyanto, Nilanjan Roy^*, Yan Wang

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

Abstract

We design an experiment to analyse the consequences of dark trading in a financial market. The channel through which dark trading affects market efficiency depends critically on how information regarding fundamentals is distributed among investors. When information is concentrated in the hands of a few investors, possibly due to sparse investor connectedness or low media coverage, dark trading primarily impacts market efficiency by deteriorating the quality of asset prices. When information is diffused, dark trading no longer harms price discovery, but the unobserved liquidity entails welfare loss. Dark trading does not widen the earnings gap between informed and uninformed traders. © The Author(s) 2025..

Original language	English
Pages (from-to)	1711-1733
Journal	The Economic Journal
Volume	135
Issue number	669
Online published	27 Jan 2025
DOIs	https://doi.org/10.1093/ej/ueaf007
Publication status	Published - Jul 2025

Funding

We acknowledge the financial support from the General Research Fund sponsored by the Hong Kong RGC (CityU 11500019) and the National Research Foundation (NRF) CREATE -Future Resilient System II.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth
SDG 10 Reduced Inequalities

Publisher's Copyright Statement

COPYRIGHT TERMS OF DEPOSITED POSTPRINT FILE: This is a pre-copyedited, author-produced version of an article accepted for publication in The Economic Journal following peer review. The version of record Halim, E., Riyanto, Y. E., Roy, N., & Wang, Y. (2025). How Dark Trading Harms Financial Markets. The Economic Journal, Article ueaf007. Advance online publication. https://doi.org/10.1093/ej/ueaf007 is available online at: https://academic.oup.com/ej/advance-article/doi/10.1093/ej/ueaf007/7984482

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AB - We design an experiment to analyse the consequences of dark trading in a financial market. The channel through which dark trading affects market efficiency depends critically on how information regarding fundamentals is distributed among investors. When information is concentrated in the hands of a few investors, possibly due to sparse investor connectedness or low media coverage, dark trading primarily impacts market efficiency by deteriorating the quality of asset prices. When information is diffused, dark trading no longer harms price discovery, but the unobserved liquidity entails welfare loss. Dark trading does not widen the earnings gap between informed and uninformed traders. © The Author(s) 2025..

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How Dark Trading Harms Financial Markets

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