Abstract
Prior research posits that traders with short-lived information favor lit exchanges over dark pools due to execution certainty. This paper focuses on the relation between informed trading based on firm fundamentals and dark pool volume because the preferred venue for traders with longer-lived information is less certain. The proportion of trading volume executed in dark pools is positively correlated with short interest. This result is stronger for stocks that suffer from greater uncertainty and stocks targeted by transient institutional investors. Short sellers profit substantially from their information as subsequent returns are lower for heavily shorted stocks with greater dark pool volume.
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