Optimal Liquidation in Dark Pools

59 Pages Posted: 17 Feb 2009 Last revised: 18 Apr 2014

Peter Kratz

Humboldt University of Berlin

Torsten Schoeneborn

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 12, 2013

Abstract

We consider a large trader liquidating a portfolio using a transparent trading venue with price impact and a dark pool with execution uncertainty. The optimal execution strategy uses both venues continuously, with dark pool orders over-/underrepresenting the portfolio size depending on adverse selection and return correlations. Trading at the traditional venue is delayed depending on dark liquidity and 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. Pushing up prices at the traditional venue while selling in the dark pool might generate profits.

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

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

Suggested Citation

Kratz, Peter and Schoeneborn, Torsten, Optimal Liquidation in Dark Pools (July 12, 2013). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1344583 or http://dx.doi.org/10.2139/ssrn.1344583

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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