Dynamic Dark Pool Trading Strategies in Limit Order Markets

Sabrina Buti, Barbara Rindi (barbara.rindi@unibocconi.it) and Ingrid M. Werner
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Sabrina Buti: University of Toronto
Ingrid M. Werner: Ohio State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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.

Date: 2010-03
New Economics Papers: this item is included in nep-cta and nep-mst
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Working Paper: Dynamic Dark Pool Trading Strategies in Limit Order Markets (2010)
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