Optimal Liquidation in Dark Pools
Humboldt University of Berlin
AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance
July 12, 2013
EFA 2009 Bergen Meetings Paper
We consider a large trader liquidating a portfolio using a transparent trading venue with price impact and a dark pool with execution uncertainty. The optimal execution strategy uses both venues continuously, with dark pool orders over-/underrepresenting the portfolio size depending on adverse selection and return correlations. Trading at the traditional venue is delayed depending on dark liquidity and adverse selection. If future returns depend on historical dark pool liquidity, then sending orders to the dark pool can be worthwhile simply to gather information. Pushing up prices at the traditional venue while selling in the dark pool might generate profits.
Number of Pages in PDF File: 59
Keywords: Dark pools, Optimal liquidation, Adverse selection, Market microstructure, Illiquid markets
JEL Classification: C02, C61, G11, G12, G20working papers series
Date posted: February 17, 2009 ; Last revised: April 18, 2014
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