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Dark Pool Trading Strategies, Market Quality and Welfare

Sabrina Buti, Barbara Rindi (barbara.rindi@unibocconi.it) and Ingrid M. Werner

No 530, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

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.

Date: 2014
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