Abstract

Using takeover rumors as informed trading events, this paper investigates dark pool trading characteristics as well as the influence of dark pool activity on the price impact in open markets. We find that dark pool participation impacts return, volatility and bid–ask spread of the rumored takeover targets. A closer examination of the trading venues reveals that as the relative trading volume in dark pools increases, the price discovery in the dark pool also sees a marginal increase. Interestingly, most of the permanent price impact seems to emanate from small size trades. A possible explanation could be that because of the low execution probability in dark pools, informed traders prefer to slice their orders into small pieces.