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WORKING PAPER

421.

Dark Pool Trading Strategies

by 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 bene…t 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 magni…ed if the dark pool executes periodically but do not change signi…cantly if the dark pool is continuous.

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Last updated September 18, 2013