Dark Pool Trading Strategies
University of Toronto - Rotman School of Management
Bocconi University and IGIER
Ingrid M. Werner
The Ohio State University - Fisher College of Business
Ottobre 17, 2011
Charles A. Dice Center Working Paper No. 2010-6
Fisher College of Business Working Paper No. 03-006
AFA 2012 Chicago Meetings Paper
We model a financial market where traders have access both to a fully transparent limit order book (LOB) and to an opaque Dark Pool (DP). When a DP is introduced to a LOB market, orders migrate to the DP from the LOB, but overall trading volume increases. Moreover, inside quoted depth in the LOB decreases, but quoted spreads tend to narrow in deep books and widen in shallow ones. DP market share is higher when LOB depth is high, when LOB spread is narrow, when the tick size is large and when traders seek protection from price impact. When depth decreases on one side of the LOB, liquidity is drained from the DP. When Flash orders provide select traders with information about the state of the DP, more orders migrate from the LOB to the DP but overall market quality improves.
Number of Pages in PDF File: 67
Keywords: Dark Pool, Limit Order Book, Trading Strategies
JEL Classification: G10, G20, G24, D40
Date posted: March 18, 2010 ; Last revised: November 11, 2011
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