Do Dark Pools Harm Price Discovery?

Forthcoming, Review of Financial Studies

53 Pages Posted: 16 Dec 2010 Last revised: 16 Nov 2013

See all articles by Haoxiang Zhu

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: November 16, 2013


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.

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

JEL Classification: G12, G14, G18

Suggested Citation

Zhu, Haoxiang, Do Dark Pools Harm Price Discovery? (November 16, 2013). Forthcoming, Review of Financial Studies. Available at SSRN: or

Haoxiang Zhu (Contact Author)

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

100 Main Street E62-623
Cambridge, MA 02142
United States


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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