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Do Dark Pools Harm Price Discovery?


Haoxiang Zhu


Massachusetts Institute of Technology (MIT) - Sloan School of Management

November 16, 2013

Forthcoming, Review of Financial Studies

Abstract:     
Dark pools are equity trading systems that do not publicly display orders. Dark pools offer potential price improvements but do not guarantee execution. Informed traders tend to trade in the same direction, crowd on the heavy side of the market, and face a higher execution risk in the dark pool, relative to uninformed traders. Consequently, exchanges are more attractive to informed traders, and dark pools are more attractive to uninformed traders. Under certain conditions, adding a dark pool alongside an exchange concentrates price-relevant information into the exchange and improves price discovery. Improved price discovery coincides with reduced exchange liquidity.

Number of Pages in PDF File: 53

Keywords: dark pools, price discovery, liquidity, fragmentation, equity market structure

JEL Classification: G12, G14, G18

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Date posted: December 16, 2010 ; Last revised: November 16, 2013

Suggested Citation

Zhu, Haoxiang, Do Dark Pools Harm Price Discovery? (November 16, 2013). Forthcoming, Review of Financial Studies. Available at SSRN: http://ssrn.com/abstract=1712173 or http://dx.doi.org/10.2139/ssrn.1712173

Contact Information

Haoxiang Zhu (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street E62-623
Cambridge, MA 02142
United States
HOME PAGE: http://www.mit.edu/~zhuh
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