Banning dark pools: Venue selection and investor trading costs

We analyze the relation between transaction costs and venue choice using proprietary transaction-level data from institutional trade executions in the U.K. equity market. We show that, for a given investor, a higher share of dark trading (midpoint dark pools) is associated with lower execution costs. In the context of a recent ban on dark trading, we provide evidence consistent with migration towards substitute trading venues such as periodic auctions, which has mitigated adverse effects on trading costs for large investors. We also provide micro-evidence on Menkveld et al.’s (2017) pecking order theory of venue choice over the life-cycle of large parent orders.