Dark Pool Trading Strategies, Market Quality and Welfare

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  • 1 January 2014
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      • Published in RePEc
Abstract
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 ?ll 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 ampli?ed and small traders are still worse off. All e¤ects are stronger for a continuous than for a periodic dark pool and when the tick size is large.
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