Document Type
Article
Publication Date
2019
Abstract
Prevailing research in market microstructure posits that liquidity providers bypass queue lines on exchanges by offering liquidity in dark venues with de minimis sub-penny price improvement, thus exploiting an exception to the penny quote rule. We show that (a) the SEC enforces the quote rule to prevent sub-penny queuejumping in dark pools unless trades are “pegged” to the NBBO midpoint and (b) the documented increase in dark trading due to investor queue-jumping stems from increased midpoint trading. Although encouraging pegged midpoint orders can subject traders to direct feed arbitrage, we estimate that less than 2% of shares traded per year present exploitable trading opportunities for this form of latency arbitrage, yielding annual gross potential profits of less than $20 million.
Disciplines
Business Organizations Law | Finance and Financial Management | Law | Securities Law
Recommended Citation
Robert P. Bartlett III & Justin McCrary,
Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Direct Feed Arbitrage?,
4
J. L. Fin. & Acct.
291
(2019).
Available at:
https://scholarship.law.columbia.edu/faculty_scholarship/4487
Included in
Business Organizations Law Commons, Finance and Financial Management Commons, Securities Law Commons