Dark Pool Trading Strategies, Market Quality and Welfare

53 Pages Posted: 18 Mar 2010 Last revised: 7 Jan 2016

Sabrina Buti

Université Paris Dauphine - Department of Finance

Barbara Rindi

Bocconi University and IGIER and CAREFIN

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Date Written: December 1, 2015

Abstract

We show that when a continuous dark pool is added to a limit order book that opens illiquid, book and consolidated fill rates and volume increase, but spread widens, depth declines and welfare deteriorates. The adverse effects on market quality and welfare are mitigated when book-liquidity builds but so are the positive effects on trading activity. All effects are stronger when traders' valuations are less dispersed, access to the dark pool is greater, horizon is longer, and relative tick size larger.

Keywords: Dark Pool, Limit Order Book, Trading Strategies

JEL Classification: G10, G20, G24, D40

Suggested Citation

Buti, Sabrina and Rindi, Barbara and Werner, Ingrid M., Dark Pool Trading Strategies, Market Quality and Welfare (December 1, 2015). Journal of Financial Economics (JFE), Forthcoming; AFA 2012 Chicago Meetings Paper; Charles A. Dice Center Working Paper No. 2010-6 ; Fisher College of Business Working Paper No. 2010-03-06. Available at SSRN: https://ssrn.com/abstract=1571416 or http://dx.doi.org/10.2139/ssrn.1571416

Sabrina Buti (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

Barbara Rindi

Bocconi University and IGIER and CAREFIN ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Ingrid M. Werner

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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