Dark Pool Trading Strategies, Market Quality and Welfare
University of Toronto - Rotman School of Management
Bocconi University and IGIER and CAREFIN
Ingrid M. Werner
The Ohio State University - Fisher College of Business
Charles A. Dice Center Working Paper No. 2010-6
AFA 2012 Chicago Meetings Paper
Fisher College of Business Working Paper No. 2010-03-06
We show that when a continuous dark pool is added to a limit order book that opens illiquid, book and consolidated fill rates and volume increase, but spread widens, depth declines and welfare deteriorates. The adverse effects on market quality and welfare are mitigated when book-liquidity builds but so are the positive effects on trading activity. All effects are stronger when traders' valuations are less dispersed, access to the dark pool is greater, horizon is longer, and relative tick size larger. Effects are weaker when the dark pool executes periodically. Results are robust to introducing large traders splitting orders across venues.
Number of Pages in PDF File: 65
Keywords: Dark Pool, Limit Order Book, Trading Strategies
JEL Classification: G10, G20, G24, D40
Date posted: March 18, 2010 ; Last revised: July 11, 2015
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