Strategic Informed Trading and Dark Pools

53 Pages Posted: 12 Dec 2018 Last revised: 2 Feb 2020

See all articles by Mao Ye

Mao Ye

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

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: February 1, 2020

Abstract

We analyze how a large informed trader chooses between a lit exchange and a dark pool. We show that (1) the market share of the dark pool increases when the informed trader trades; (2) the market share of the dark pool increases more when the value of information is higher; and (3) price discovery decreases with the value of information. We find empirical support for these predictions using trades from activists reported in Schedule 13D filings. A one-standard-deviation increase in the value of an activist’s information increases the dark pool’s market share by 5.8% and reduces price discovery by 9.7%.

Keywords: Dark pool, rational expectations equilibrium, price discovery, shareholder activism, Schedule 13D filings

JEL Classification: G12, G34

Suggested Citation

Ye, Mao and Zhu, Wei, Strategic Informed Trading and Dark Pools (February 1, 2020). Available at SSRN: https://ssrn.com/abstract=3292516 or http://dx.doi.org/10.2139/ssrn.3292516

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 )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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