Sunshine Trading: Flashes of Trading Intent at the NASDAQ

We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from the NASDAQ as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in the NASDAQ. In addition, overall market quality improves substantially when the flash functionality is introduced and deteriorates when it is removed. One explanation for our findings is that flash orders are placed by less informed traders and fulfill their role as an advertisement of uninformed liquidity needs. They successfully attract responses from liquidity providers immediately after the announcement is placed, thus lowering the risk-bearing cost for the overall market. Our study is important in understanding the impact of voluntary disclosure, in guiding future market design choices, and in the current debate on dark pools and IOIs.