Open Access
Do Dark Pools Harm Price Discovery
TLDR
In this article, a dark pool alongside an exchange concentrates price-relevant information into the exchange and improves price discovery, which coincides with reduced exchange liquidity, making the exchanges more attractive to informed traders.Abstract:
Dark pools are equity trading systems that do not publicly display orders. Dark pools oer potential price improvements but do not guarantee execution. Informed traders tend to trade in the same direction, crowd on the heavy side of the market, and face a higher execution risk in the dark pool, relative to uninformed traders. Consequently, exchanges are more attractive to informed traders, and dark pools are more attractive to uninformed traders. Under certain conditions, adding a dark pool alongside an exchange concentrates price-relevant information into the exchange and improves price discovery. Improved price discovery coincides with reduced exchange liquidity.read more
Citations
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Journal ArticleDOI
Dark Trading and Price Discovery
TL;DR: In this paper, the authors show that dark trades are less informed than lit trades and that high levels of dark trading increase adverse selection risk on the lit exchange by increasing the concentration of informed traders.
Posted Content
Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network
TL;DR: In this paper, the authors present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact, where agents maximize their profits by either trading at a DM or by submitting an order for (possibly) uncertain execution at a CN.
Journal ArticleDOI
Price Discovery Without Trading: Evidence from Limit Orders
TL;DR: The authors showed that limit orders played a larger role in price discovery and with high-frequency traders' limit orders playing the largest role, while non-HFTs submit limit orders 50% more frequently than HFTs.
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Trading Rules, Competition for Order Flow and Market Fragmentation
TL;DR: In this paper, the authors investigate competition between traditional stock exchanges and new "dark" trading venues using an important difference in regulatory treatment and find that spread constraints significantly weaken exchanges' competitiveness.
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A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network
TL;DR: In this paper, the authors extend the Kyle (1985) framework to allow both endogenous price and endogenous execution probability to be expressed in terms of fundamental value uncertainty, and examine the market outcome when the informed trader can split trades between an exchange and a crossing network (dark pool).
References
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Bid, ask and transaction prices in a specialist market with heterogeneously informed traders
TL;DR: The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits as discussed by the authors, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity.
Posted Content
Market liquidity and funding liquidity
TL;DR: In this article, the authors provide a model that links an asset's market liquidity and traders' funding liquidity, i.e., the ease with which they can obtain funding, to explain the empirically documented features that market liquidity can suddenly dry up, has commonality across securities, is related to volatility, is subject to flight to quality, and comoves with the market.
Journal ArticleDOI
A Theory of Intraday Patterns: Volume and Price Variability
Anat R. Admati,Paul Pfleiderer +1 more
TL;DR: In this paper, the authors developed a theory that concentrated trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders and provided a partial explanation for some of the recent empitical findings concerning the patterns of volume and price variability in intraday transaction data.
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Optimal control of execution costs
Dimitris Bertsimas,Andrew W. Lo +1 more
TL;DR: In this article, the authors derive dynamic optimal trading strategies that minimize the expected cost of trading a large block of equity over a fixed time horizon, given a fixed block of shares to be executed within a fixed finite number of periods.