Staff Papers
Published Date: 07 November 2019

Effects of Dark Trading on Liquidity of Singapore Equity Market

MAS Staff Paper No. 56, November 2019 - By Chioh Wenn Sheng, Chua Bing Kiat, Andrew Ang, Fan Jia Rong and Brandon Sim  

ABSTRACT

The growth of dark trading in equities has driven academic research and attracted attention from regulators concerned about its effects on market quality. In this paper, we analyse and simulate the effects of dark trading on the market quality and efficiency of Singapore’s equity market. While our results generally support the conventional criticisms of dark trading, we find that on-exchange liquidity ("lit market liquidity") starts to worsen only when the proportion of dark trading increases beyond certain levels. In fact, our simulations suggest that some dark trading can actually improve lit market liquidity for illiquid, and small and mid-market capitalisation stocks. Our findings suggest a more calibrated and differentiated approach towards dark trading could be beneficial in promoting a more liquid market for such stocks as opposed to the current regime which imposes a blanket minimum threshold on block trades of all stocks.