Price Manipulation in a Market Impact Model with Dark Pool

28 Pages Posted: 19 Mar 2011 Last revised: 19 Jul 2017

See all articles by Florian Klöck

Florian Klöck

University of Mannheim

Alexander Schied

University of Mannheim

Yuemeng Sunny Sun

Cornell University - School of Operations Research and Industrial Engineering

Date Written: August 25, 2011

Abstract

For a market impact model, price manipulation and related notions play a role that is similar to the role of arbitrage in a derivatives pricing model. Here, we give a systematic investigation into such regularity issues when orders can be executed both at a traditional exchange and in a dark pool. To this end, we focus on a class of dark-pool models whose market impact at the exchange is described by an Almgren-Chriss model. Conditions for the absence of price manipulation for all Almgren-Chriss models include the absence of temporary cross-venue impact, the presence of full permanent cross-venue impact, and the additional penalization of orders executed in the dark pool. When a particular Almgren-Chriss model has been fixed, we show by a number of examples that the regularity of the dark-pool model hinges in a subtle way on the interplay of all model parameters and on the liquidation time constraint. The paper can also be seen as a case study for the regularity of market impact models in general.

Keywords: Price manipulation, transaction-triggered price manipulation, positive expected liquidation costs, dark pool, market impact model, optimal order execution, optimal liquidation

Suggested Citation

Klöck, Florian and Schied, Alexander and Sun, Yuemeng, Price Manipulation in a Market Impact Model with Dark Pool (August 25, 2011). Available at SSRN: https://ssrn.com/abstract=1785409 or http://dx.doi.org/10.2139/ssrn.1785409

Florian Klöck

University of Mannheim ( email )

Department of Mathematics
A 5, 6
Mannheim, 68159
Germany
+49-621-181-2458 (Phone)

Alexander Schied (Contact Author)

University of Mannheim ( email )

Department of Mathematics
A 5, 6
Mannheim, 68131
Germany
+49-621-181-2513 (Phone)

HOME PAGE: http://www.alexschied.de/

Yuemeng Sun

Cornell University - School of Operations Research and Industrial Engineering ( email )

288 Rhodes Hall
Cornell University
Ithaca, NY 14853
United States

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