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Dark Pool Trading Strategies

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  • Sabrina Buti
  • Barbara Rindi
  • Ingrid M. Werner

Abstract

We model a financial market where traders have access both to a fully transparent limit order book (LOB) and to an opaque Dark Pool (DP). When a DP is introduced to a LOB market,orders migrate to the DP from the LOB, but overall trading volume increases. Moreover, inside quoted depth in the LOB decreases, but quoted spreads tend to narrow in deep books and widen in shallow ones. DP market share is higher when LOB depth is high, when LOB spread is narrow, when the tick size is large and when traders seek protection from price impact. When depth decreases on one side of the LOB, liquidity is drained from the DP. When Flash orders provide select traders with information about the state of the DP, more orders migrate from the LOB to the DP but overall market quality improves.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 421.

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Date of creation: 2011
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Handle: RePEc:igi:igierp:421

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Citations

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Cited by:
  1. de Jong, Frank & Degryse, Hans & van Kervel, Vincent, 2011. "The impact of dark trading and visible fragmentation on market quality," CEPR Discussion Papers 8630, C.E.P.R. Discussion Papers.
  2. Alex Boulatov & Thomas J. George, 2013. "Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 2096-2137.
  3. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2011. "Sunshine trading: Flashes of trading intent at the NASDAQ," Working Paper, Norges Bank 2011/17, Norges Bank.
  4. Lena Korber & Oliver Linton & Michael Vogt, 2013. "The effect of fragmentation in trading on market quality in the UK equity market," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP42/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  5. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2013. "Competition/fragmentation in equities markets: A literature survey," SAFE Working Paper Series 35, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  6. Buti, Sabrina & Rindi, Barbara, 2013. "Undisclosed orders and optimal submission strategies in a limit order market," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(3), pages 797-812.

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