Optimal Liquidation in Dark Pools

Quantitative Finance, Forthcoming

33 Pages Posted: 5 Dec 2015

See all articles by Peter Kratz

Peter Kratz

Humboldt University of Berlin

Torsten Schoeneborn

AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2014

Abstract

We consider a large trader liquidating a portfolio using a transparent trading venue with price impact and a dark pool with execution uncertainty. The optimal execution strategy uses both venues continuously, with dark pool orders over-/underrepresenting the portfolio size depending on return correlations; trading at the traditional venue is delayed depending on dark liquidity. Pushing up prices at the traditional venue while selling in the dark pool might generate profits. If future returns depend on historical dark pool liquidity, then sending orders to the dark pool can be worthwhile simply to gather information.

Keywords: Dark pools, Optimal liquidation, Adverse selection, Market microstructure, Illiquid markets

JEL Classification: C02, C61, G11, G12, G20

Suggested Citation

Kratz, Peter and Schoeneborn, Torsten, Optimal Liquidation in Dark Pools (April 18, 2014). Quantitative Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2698419

Peter Kratz

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

Torsten Schoeneborn (Contact Author)

AHL (Man Investments) ( email )

Sugar Quay
Lower Thames Street
London, EC3R 6DU
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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