Regulation or Competition:Major-Minor Optimal Liquidation across Dark and Lit Pools

Thibaut Mastrolia and Hao Wang

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Abstract: We study the optimal liquidation problem in both lit and dark pools for investors facing execution uncertainty in a continuous-time setting with market impact. First, we design an optimal make--take fee policy for a large investor liquidating her position across both pools, interacting with small investors who pay trading fees. We explicitly characterize the large investor's optimal liquidation strategies in both lit and dark pools using BSDEs under a compensation scheme proposed by an exchange to mitigate market impact in the lit venue. Second, we consider a purely competitive model with major--minor traders in the absence of regulation. We provide explicit solutions to the associated HJB--Fokker--Planck system. Finally, we illustrate our results through numerical experiments, comparing market impact under a regulated market with a strategic large investor to that in a purely competitive market with both small and large investors.

Date: 2025-09
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