Albert Menkveld, VU University Amsterdam; Bart Zhou Yueshen, INSEAD; and Haoxiang Zhu, MIT and NBER

Shades of Darkness: A Pecking Order of Trading Venues

Menkveld, Yueshen, and Zhu characterize the dynamic fragmentation of U.S. equity markets using a unique dataset that disaggregates dark transactions into five venue types. The "pecking order" hypothesis states that investors "sort" various venue types, putting low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint dark pools in the middle, and lit markets at the bottom. As predicted, following VIX shocks, macroeconomic news, and firms' earnings surprises, changes in venue market shares become progressively more positive (or less negative) down the pecking order. The researchers further document heterogeneity across dark venue types and stock size groups.