Market structure is usually treated as a trading-desk issue: where orders go, how wide spreads are, and how much market impact investors face. But new research shows that market structure can also shape decisions in the boardroom.
In a recent Journal of Corporate Financestudy, we find that companies with more off-exchange, or “dark,” trading rely more heavily on stock-based CEO pay. The reason is not that equity becomes cheaper to grant. It is that dark trading can make stock prices more informative, giving boards a better benchmark for evaluating management performance
Analyzing 12,667 firm-years of US public companies from 2007 to 2021, we find that firms with more dark trading allocate roughly 10.6 percentage points more of CEO compensation to stock—a 21% increase relative to the sample average. Over the same period, the share of trading volume executed off-exchange rose from 23% to 28%.
The findings reveal a direct link between where trading occurs and how companies incentivize their executives. Market structure does more than affect transaction costs; it influences the quality of price signals that boards rely on when designing compensation. For investment professionals, that has implications for interpreting pay disclosures, assessing governance quality, and evaluating the potential effects of market structure regulation.
