Price Manipulation, Price Discovery and Transaction Costs in the Crossing Network

57 Pages Posted: 18 Mar 2012

See all articles by Mao Ye

Mao Ye

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

Date Written: March 14, 2012


This paper proposes the first tractable rational expectation equilibrium model that includes 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) in which buy and sell orders are passively matched using the price set by the stock exchange. The crossing network reduces price discovery and the impact is stronger for stocks with higher fundamental value uncertainty. However, the informed trader does not have the incentive to manipulate the market by trading in the wrong direction in the exchange and then benefiting from the resulting mispricing by matching orders in the crossing network, because the cost to move the price away from the fundamental value is higher than the profit from the crossing network. The informed trader’s optimal decision generates positive correlation between price impact in the exchange and non-execution probability in the crossing network, and an increase in the fundamental value uncertainty increases both price impact and non-execution probability. I examine the market outcome under three different allocation rules. The 'fair access' policy proposed by the Securities and Exchange Commission harms price discovery and increases the adverse selection problem in the crossing network.

Keywords: crossing network, dark pool, price manipulation, price discovery, liquidity, rational expectation equilibrium

JEL Classification: G10, G20

Suggested Citation

Ye, Mao, Price Manipulation, Price Discovery and Transaction Costs in the Crossing Network (March 14, 2012). Available at SSRN: or

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 )

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Cambridge, MA 02138
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