Market Structure Reaches the Boardroom

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.

Nearly half of US equity volume now executes in venues that do not display orders before a trade. These include dark pools, where buyers and sellers match anonymously, and broker-dealer internalization of retail flow. Whether this helps or hurts price discovery has been a long-standing question for regulators and researchers. A growing body of evidence suggests dark trading can actually improve the information content of public prices. Our study takes this a step further by showing that the improvement has real consequences for corporate decisions.

The mechanism runs through informed traders. Institutional investors and insiders who hold genuine private information about a firm's value face a problem on lit exchanges: their large orders signal intent, and high-frequency traders pick up on that signal and trade against them.

Dark venues let informed traders execute without revealing their hand. Their information still reaches public prices through post-trade reporting, but because they can trade with less leakage, more informed trading happens in the first place. The net effect is that lit market prices end up incorporating more fundamental information.

The result holds after controlling for firm size, leverage, R&D intensity, stock liquidity, institutional ownership, and CEO characteristics. We use two identification strategies to isolate the causal effect. The more powerful one exploits the "trade-at" rule of the SEC's 2016 Tick Size Pilot Program, which restricted dark trading for a subset of stocks and effectively pushed their volume onto lit exchanges.

When dark trading was restricted for those stocks, boards cut stock-based CEO pay by 4.5 percentage points within two years. When the plumbing changed, boards changed their behaviour, because the price had become a less reliable yardstick for judging management performance.

Importantly, this is not simply a liquidity story. If dark trading just reduced trading costs, making equity cheaper to hold and therefore more attractive as pay, one would expect the "trade-at" rule to produce changes in spreads or institutional trading patterns. It does not. The channel runs specifically through price informativeness: dark trading makes the stock price a better signal, and boards respond by relying on it more.

The effect is not uniform across firms, and the pattern in the cross-section tells you something about when market structure matters most for corporate governance.

The dark trading/CEO pay relationship is strongest in smaller, younger firms with fewer public disclosures and more complex filings. These are firms with opaque information environments, exactly where better price discovery adds the most value. For boards of these firms, the price signal becomes significantly more useful as a performance measure, and they adjust pay accordingly.

The effect is also stronger where compensation committees include multiple financial experts, and where board members are less busy, and hold more of the company's stock themselves. These are boards with both the expertise to read price signals and the incentive to act on them. The link between dark trading and equity pay is not mechanical. It runs through informed governance: boards that are equipped to assess price quality are the ones adjusting pay structures in response.

• Read compensation disclosures with market structure in mind. When a board ties a large share of CEO pay to equity, it is making an implicit judgement: we believe this stock price is informative enough to serve as a performance benchmark. That judgement is more credible when it comes from a compensation committee with financial expertise and directors who have meaningful personal stakes in the stock. The results show these are exactly the boards where the dark trading/pay link is strongest. Conversely, a board that shifts toward cash and salary, particularly without obvious financial distress, may be signaling weakening confidence in its own stock price. That is worth understanding before you anchor your own analysis to the same price.
• Recognize that market structure shapes governance, not just execution. The traditional view treats where trading happens as irrelevant to fundamental analysis. The findings challenge that. Changes in trading venue composition affect how informative stock prices are, and that in turn affects how boards design incentives. If you are evaluating a company's governance quality, the information environment around its stock, including where it trades, is part of the picture.
• Watch for regulatory changes to off-exchange trading. The "trade-at" rule results show that when regulators restricted dark trading, boards cut stock-based pay within two years. Any future policy that curtails off-exchange trading, whether through "trade-at" rules, payment-for-order-flow bans, or new transparency mandates, could weaken the price informativeness channel and alter incentive structures. These effects will not appear in standard risk models, but they will show up over time in governance decisions, capital allocation, and the alignment between executive incentives and firm performance.

Market structure is often viewed as a trading-desk concern. Our findings suggest it deserves broader attention: the quality of price signals influences how boards govern and compensate executives. As dark trading grows and regulators revisit off-exchange markets, investment professionals should recognize that changes in market structure can have consequences far beyond execution costs and pay due attention.

_{Based on: Rzayev, K., Savaser, T., and Sisli-Ciamarra, E. (2025). "Dark Trading and CEO Pay." Journal of Corporate Finance, 94, 102848.}