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Dark Pool Trading Strategies, Market Quality and Welfare

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  • Sabrina Buti
  • Barbara Rindi
  • Ingrid M. Werner

Abstract

We build a model of a limit order book and examine the consequences of adding a dark pool. Starting with an illiquid book, we show that book and consolidated ?ll rates and volume increase, but the spread widens, depth declines and welfare deteriorates. When book liquidity increases, more orders migrate to the dark pool and large traders?welfare improves; but while the spread-increase is dampened, the depth-reduction is ampli?ed and small traders are still worse off. All e¤ects are stronger for a continuous than for a periodic dark pool and when the tick size is large.

Suggested Citation

  • Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2014. "Dark Pool Trading Strategies, Market Quality and Welfare," Working Papers 530, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:530
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    Cited by:

    1. Brugler, James, 2015. "Into the light: dark pool trading and intraday market quality on the primary exchange," Bank of England working papers 545, Bank of England.

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