Information Asymmetry and Trading in Dark Pools : Evidence From Earnings Announcement and Analyst Recommendation Revisions

Using the first and recently available universe of dark pool trading in the U.S. from FINRA, we document trading patterns around scheduled and unscheduled corporate information events. We find that there is more trading in dark pools in the week of earnings announcement as well as analyst recommendation revision relative to trading in exchanges as well as relative to non-news weeks. As predicted by theory, the extent of trading in the dark pools is a function of ownership by institutional investors who are endowed with short-lived information. We document that there is pre-news week trading. Hinting at broker-customer conflict, we find that pre-week trading happens in dark pools where proprietary flow is allowed. Post-earnings announcement drift is stronger for stocks with higher levels of dark pool trading indicating that dark pools delay price discovery. Information about dark volume is informative to equity markets