Dark Pool Trading Strategies, Market Quality and Welfare

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 fill 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 amplified and small traders are still worse off. All effects are stronger for a continuous than for a periodic dark pool and when the tick size is large.