Price manipulation in a market impact model with dark pool

Florian Kl\"ock, Alexander Schied and Yuemeng Sun

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Abstract: For a market impact model, price manipulation and related notions play a role that is similar to the role of arbitrage in a derivatives pricing model. Here, we give a systematic investigation into such regularity issues when orders can be executed both at a traditional exchange and in a dark pool. To this end, we focus on a class of dark-pool models whose market impact at the exchange is described by an Almgren--Chriss model. Conditions for the absence of price manipulation for all Almgren--Chriss models include the absence of temporary cross-venue impact, the presence of full permanent cross-venue impact, and the additional penalization of orders executed in the dark pool. When a particular Almgren--Chriss model has been fixed, we show by a number of examples that the regularity of the dark-pool model hinges in a subtle way on the interplay of all model parameters and on the liquidation time constraint. The paper can also be seen as a case study for the regularity of market impact models in general.

Date: 2012-05, Revised 2014-05
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1205.4008

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