hero working papers

Dark Pool Trading Strategies

Number: 421
Year: 2011
Author(s): Sabrina Buti, Barbara Rindi, Ingrid M. Werner
We build a model where a dark pool is introduced to a transparent limit order book market. We show that orders are diverted to the dark pool, but more orders are also executed so total volume increases especially when the order book is shallow. A smaller spread, greater depth and larger tick size stimulate order migration to the dark pool. Institutional traders always benefit from having access to the dark pool. Market quality and retail traders' welfare deteriorate when the order book is shallow, but improve when it is deep. These effects are stronger for a continuous than for a periodic dark pool. If pre-trade transparency is required, the effects on market quality and retail traders' welfare are magnified if the dark pool executes periodically but do not change significantly if the dark pool is continuous.