Do Dark Pools Harm Price Discovery

By Haoxiang Zhu. 2013

260 citations recorded by the source corpus.

Dark pools are equity trading systems that do not publicly display orders. Dark pools offer 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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7dce4c5542c9856a3df061722cac997621a6252d

Citations in the corpus

• What Is the Optimal Trading Frequency in Financial Markets (2017, unknown): “See Zhu (2014) and Menkveld, Yueshen, and Zhu (2016) for more discussions of dark trading in U.S. equity markets.”
• Informed trading and price discovery before corporate events (2015, unknown): “Some trading platforms such as Dark Pools are designed to offer lower cost but with lower fill rates (see Zhu, 2014 ; Buti, Rindi, and Werner, 2017 ).”
• Dark Trading and Price Discovery (2015, unknown): “3 Our empirical work is guided by two recent theoretical models of how dark trading impacts price discovery (Ye, 2012; Zhu, 2014).”
• Price Discovery without Trading: Evidence from Limit Orders (2019, unknown): “Hidden orders seem to be submitted by uninformed market participants as they have lower price impacts (Zhu (2013)).”
• Trading Rules, Competition for Order Flow and Market Fragmentation (2015, unknown): “BLOCK venues are the most traditional form of dark pool and are modelled widely in the finance literature (see Buti, Rindi, and Werner, 2011a; Ye, 2011; Zhu, 2014).”