Asymmetries in Dark Pool Reference Prices

63 Pages Posted: 9 Mar 2017 Last revised: 5 Apr 2017

See all articles by Matteo Aquilina

Matteo Aquilina

Financial Conduct Authority

Sean Foley

University of Sydney Business School

Peter O'Neill

Financial Conduct Authority

Thomas Ruf

University of New South Wales (UNSW)

Date Written: September 5, 2016

Abstract

Dark pools volumes have increased significantly over the last decade. This has raised concerns on the reliability of reference prices used by these pools, and asymmetric participant outcomes via “latency arbitrage”. Using a novel data set provided by the major UK exchanges and dark pools that contain millisecond matching engine timestamps we characterise the extent of stale reference prices in the UK for the first time. We find that HFTs benefit in the vast majority of stale trades and co-located participants more than non co-located. We also characterise the mechanism of dark pool latency arbitrage by demonstrating aggressive and passive initiation strategies and its relationship with participant dark liquidity provision. We also find evidence of better execution outcomes by broker’s trading in their own dark pools and HFTs. Overall, we find evidence of asymmetric outcomes across participant types, which may result from participants’ differing abilities to observe and manage latency, and differing abilities to engage in effective smart order routing in a fragmented market.

Keywords: market data, transparency, high-frequency trading, Market microstructure, latency arbitrage

JEL Classification: G10, G14, G18

Suggested Citation

Aquilina, Matteo and Foley, Sean and O'Neill, Peter and Ruf, Thomas, Asymmetries in Dark Pool Reference Prices (September 5, 2016). FCA Occasional Paper No. 21. Available at SSRN: https://ssrn.com/abstract=2848120

Matteo Aquilina (Contact Author)

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Peter O'Neill

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Thomas Ruf

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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