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. 2010-10
Fisher College of Business Working Paper No. 2010-03-010
We build a model of a limit order book and examine the consequences of adding a dark pool. Starting with an illiquid book, we show that book and consolidated fill rates and volume increase, but the spread widens, depth declines and welfare deteriorates. When book liquidity increases, more orders migrate to the dark pool and large trader's welfare improves; but while the spread increase is dampened, the depth-reduction is amplified and small traders are still worse off. All effects are stronger for a continuous than for a periodic dark pool and when the tick size is large.
Number of Pages in PDF File: 59
Keywords: Dark pools, fragmentation, market quality, price discovery, market efficiency, SEC, microstructure
JEL Classification: G10, G12, G14, G18, G20
Date posted: June 26, 2010 ; Last revised: November 11, 2014
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