The Market Quality Effects of Sub-Second Frequent Batch Auctions : Evidence from Dark Trading Restrictions

Recent European regulatory restrictions on dark trading induced an increase in sub-second frequent batch/periodic auctions (PA). We exploit this development to investigate the effects of PA on market quality. The restrictions are linked to an observable increase in PA and an economically meaningful loss of liquidity. PA is also associated with a significant decline in liquidity and informational efficiency. However, consistent with Budish et al. (2015 – The Quarterly Journal of Economics, 130, 1547 ), increased execution via PA leads to a decline in adverse selection costs, which underscores its potential as a trading mechanism for addressing latency arbitrage and the technological arms race