Abstract

http://ssrn.com/abstract=1344583
 
 

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Optimal Liquidation in Dark Pools


Peter Kratz


Humboldt University of Berlin

Torsten Schoeneborn


AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance

April 13, 2012

EFA 2009 Bergen Meetings Paper

Abstract:     
We consider a large trader seeking to liquidate a portfolio using both a transparent trading venue and a dark pool. Our model captures the price impact of trading in transparent traditional venues as well as the execution uncertainty of trading in a dark pool. The unique optimal execution strategy uses both venues continuously. The order size in the dark pool can over- or underrepresent the portfolio size depending on adverse selection, the correlation structure of the assets in the portfolio and the matching rule. Introduction of a dark pool results in delayed trading at the traditional venue. The appeal of the dark pool is increased by liquidity but reduced by 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. By pushing up prices at the traditional venue and parallel selling in the dark pool, a trader might generate profits; we provide sufficient conditions to rule out such profitable price manipulation strategies.

Number of Pages in PDF File: 59

Keywords: Dark pools, Optimal liquidation, Adverse selection, Market microstructure, Illiquid markets

JEL Classification: C02, C61, G11, G12, G20

working papers series


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Date posted: February 17, 2009 ; Last revised: April 18, 2012

Suggested Citation

Kratz, Peter and Schoeneborn, Torsten, Optimal Liquidation in Dark Pools (April 13, 2012). EFA 2009 Bergen Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1344583 or http://dx.doi.org/10.2139/ssrn.1344583

Contact Information

Peter Kratz (Contact Author)
Humboldt University of Berlin ( email )
Unter den Linden 6
Berlin, Berlin 10099
Germany
Torsten Schoeneborn
AHL (Man Investments) ( email )
Sugar Quay
Lower Thames Street
London, EC3R 6DU
Great Britain
University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )
Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom
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