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Abstract
Abstract
This paper examines the relationship between ASIC s minimum price improvement rule implementation on dark trading and the impact on the efficiency of Australian s pre-trade transparent market for ASX listed cash equities. ASIC implemented meaningful price improvement a regulatory market design change on 26 May 2013 forcing dark-venue trades to offer at-least-one-tick-improvement on prevailing-NBBO-quote. Pre-trade transparent (lit market) and dark markets differ based on their regulatory structures. Lit markets offer pre-trade transparency and fair-access whilst dark venues are pre-trade transparency exempt, and do not offer full and fair access to their order book. I construct a 2SLS framework to model determinants of dark trading and use dark trading as an instrument to examine its effect and impact on market efficiency and market liquidity ex ante and ex post ASIC s exogenous regulatory event. I find evidence of a decrease in asymmetric information ex post rule implementation and present evidence of decreased round trip costs of execution within the lit market after ASIC implemented meaningful price improvement. I argue the decrease in transaction costs not only evidence the rule s positive effect on motivating liquidity providers to transact on the informed lit-market by influencing both informed and uninformed order flow to be less segmented, but also evidences improved market efficiency and market liquidity conditions of the Australian cash equities market. My results findings inform public debate as market operators and regulators around the world continue to expend significant financial, process, systems and people resources in an attempt to enhance market efficiency as well as identify, detect, investigate and prosecute market manipulation. Regulators will continue to be called upon to make regulatory market design changes or maintain current regulation; whichever best achieves the regulators goals of increasing market efficiency, market integrity and systemic risk.