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A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network

59 Pages Posted: 10 Jan 2010 Last revised: 19 Jun 2011

Mao Ye

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Date Written: June 9, 2011

Abstract

This paper extends the Kyle (1985) framework to allow both endogenous price and endogenous execution probability. I use the model to examine the market outcome when the informed trader can split trades between an exchange and a crossing network (dark pool). The crossing network reduces price discovery and volatility. The impact is stronger for stocks with higher fundamental value uncertainty. An increase in the fundamental value uncertainty is found to increase the price impact in the exchange and non-execution probability in the crossing network, but creates a comparative advantage for the crossing network, as well as increasing its market share.

Keywords: Crossing Network, Dark Pool, Price Discovery, Liquidity

JEL Classification: G10, G20

Suggested Citation

Ye, Mao, A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network (June 9, 2011). Available at SSRN: https://ssrn.com/abstract=1521494 or http://dx.doi.org/10.2139/ssrn.1521494

Mao Ye (Contact Author)

University of Illinois at Urbana-Champaign ( email )

406 Wohlers
1206 South 6th Street
Champaign, IL 61820
United States
2172440474 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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