Welfare and Gains from Trade in Dark Pools

67 Pages Posted: 25 Apr 2024

See all articles by Alejandro Bernales

Alejandro Bernales

Universidad de Chile

Daniel Ladley

University of Leicester - School of Business

Evangelos Litos

University of Leicester - School of Business

Marcela Valenzuela

Pontificia Universidad Catolica de Chile

Date Written: April 26, 2024

Abstract

Two intertwined channels drive opposite effects on the gains from trade for liquidity takers and liquidity providers. First, dark pools offer a price improvement (deterioration) for liquidity takers (providers) compared to limit order markets. Second, dark pools provide higher (lower) delaying costs for liquidity takers (providers) than lit venues. Depending on which of the two channels dominate for each trader type, liquidity takers and liquidity providers obtain increased (or reduced) welfare, which determines their participation in the dark pool. Finally, we perform an additional welfare analysis of potential regulations related to alternative order execution priority rules in dark pools.

Keywords: Dark pool, limit order market, welfare, liquidity takers and liquidity providers.

JEL Classification: C63, C73, D40, D81, G11, G14.

Suggested Citation

Bernales, Alejandro and Ladley, Daniel and Litos, Evangelos and Valenzuela, Marcela, Welfare and Gains from Trade in Dark Pools (April 26, 2024). Available at SSRN: https://ssrn.com/abstract=4807520 or http://dx.doi.org/10.2139/ssrn.4807520

Alejandro Bernales (Contact Author)

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Daniel Ladley

University of Leicester - School of Business ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Evangelos Litos

University of Leicester - School of Business ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Marcela Valenzuela

Pontificia Universidad Catolica de Chile

Avda. Vicuña Mackenna 4860
Macul, 780436
Chile

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

Paper statistics

Downloads
17
Abstract Views
115
PlumX Metrics