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Dynamic Dark Pool Trading Strategies in Limit Order Markets

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  • Buti, Sabrina

    (University of Toronto)

  • Rindi, Barbara

    (Bocconi University)

  • Werner, Ingrid M.

    (Ohio State University)

Abstract

We model a dynamic limit order market with traders that submit orders either to a limit order book (LOB) or to a Dark Pool (DP). We show that there is a positive liquidity externality in the DP, that orders migrate from the LOB to the DP, but that overall trading volume increases when a DP is introduced. We also demonstrate that DP market share is higher when LOB depth is high, when LOB spreads are narrow, when there is more volatility, and when the tick size is larger. Further, while inside quoted depth in the LOB always decreases when a DP is introduced, quoted spreads can narrow for liquid stocks and widen for illiquid stocks. Finally, when .ash orders provide select traders with information about the state of the DP, we show that more orders migrate from the LOB to the DP.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-6.pdf
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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2010-6.

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Date of creation: Mar 2010
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Handle: RePEc:ecl:ohidic:2010-6

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  1. Moinas, Sophie, 2010. "Hidden Limit Orders and Liquidity in Order Driven Markets," IDEI Working Papers 600, Institut d'Économie Industrielle (IDEI), Toulouse.
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Cited by:
  1. Degryse, H.A. & Jong, F.C.J.M. de & Kervel, V.L. van, 2011. "The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)," Discussion Paper 2011-069, Tilburg University, Center for Economic Research.

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