Sharks in the dark: quantifying HFT dark pool latency arbitrage

Matteo Aquilina, Sean Foley, Peter O'Neill and Thomas Ruf

No 1115, BIS Working Papers from Bank for International Settlements

Abstract: We investigate stale reference pricing and liquidity provision in dark pools using proprietary, participant-level regulatory data. We show a substantial amount of stale trading occurs, imposing large costs on passive dark pool participants. Consistent with these costs, HFTs almost never provide liquidity in the dark, instead frequently consuming liquidity, in particular in order to take advantage of stale reference prices. Finally, we show that market design interventions randomizing dark execution times are successful at countering dark pool latency arbitrage, protecting passive providers of dark liquidity. Our results have substantial implications for practitioners and policymakers aiming to improve liquidity provision in dark pools.

Keywords: high-frequency trading; dark pools; latency arbitrage; stale quotes; reference prices (search for similar items in EconPapers)
JEL-codes: D47 G10 G14 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-mst
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Journal Article: Sharks in the dark: Quantifying HFT dark pool latency arbitrage (2024)
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