Price manipulation in a market impact model with dark pool
AbstractFor a market impact model, price manipulation and related notions play a role that is similar to the role of arbitrage in a derivatives pricing model. Here, we give a systematic investigation into such regularity issues when orders can be executed both at a traditional exchange and in a dark pool. To this end, we focus on a class of dark-pool models whose market impact at the exchange is described by an Almgren--Chriss model. Conditions for the absence of price manipulation for all Almgren--Chriss models include the absence of temporary cross-venue impact, the presence of full permanent cross-venue impact, and the additional penalization of orders executed in the dark pool. When a particular Almgren--Chriss model has been fixed, we show by a number of examples that the regularity of the dark-pool model hinges in a subtle way on the interplay of all model parameters and on the liquidation time constraint. The paper can also be seen as a case study for the regularity of market impact models in general.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1205.4008.
Date of creation: May 2012
Date of revision: Jan 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-29 (All new papers)
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