Dark Pools and Price Discovery in Limit Order Markets

30 Pages Posted: 2 Aug 2021

Date Written: July 4, 2021

Abstract

This paper examines how the introduction of a dark pool impacts price discovery, market quality, and aggregate welfare of traders. I use a four-period model where rational and risk-neutral agents choose the order type and the venue and obtain the equilibrium numerically. The comparative statics on the order submission probability suggests a U-shaped order migration to the dark pool. The overall effect of dark trading on market quality and aggregate welfare was found to be positive but limited in size and depended on market conditions. I find mixed results for the process of price discovery. Depending on the immediacy need of traders, price discovery may change due to the presence of the dark venue.

Keywords: Dark pool, limit order book, information asymmetry

Suggested Citation

Levin, Vladimir, Dark Pools and Price Discovery in Limit Order Markets (July 4, 2021). Available at SSRN: https://ssrn.com/abstract=3880047 or http://dx.doi.org/10.2139/ssrn.3880047

Vladimir Levin (Contact Author)

Department of Finance ( email )

6,Rue Richard Coudenhove-Kalergi
L-1359 Luxembourg
Luxembourg
+352 466644-5826 (Phone)

HOME PAGE: http://vladimirlevin.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
36
Abstract Views
157
PlumX Metrics