Dark trading and alternative execution priority rules

Bernales, Alejandro, Ladley, Daniel, Litos, Evangelos and Valenzuela, Marcela (2021) Dark trading and alternative execution priority rules. Systemic Risk Centre Discussion Papers (111). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

Traders' choice between lit and dark trading venues depends on market conditions, which are affected by execution priority rules in the dark pool, adverse selection, and traders' competition. We show that dark trading activity has a non-linear relationship with asset volatility and liquidity, which explains previous mixed empirical results regarding the impact of dark pools on market quality. The introduction of dark pools increases welfare only for speculators, while other traders (even large traders) are worse off. Importantly, we show that a size execution priority rule improves global welfare and liquidity relative to a time execution priority for dark orders.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2021 The Author(s)
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C63 - Computational Techniques C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games D - Microeconomics > D4 - Market Structure and Pricing > D40 - General D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	05 Jun 2023 09:36
Last Modified:	16 Sep 2023 00:00
URI:	http://eprints.lse.ac.uk/id/eprint/118866

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