Optimal Liquidation in Dark Pools
Quantitative Finance, Forthcoming
33 Pages Posted: 5 Dec 2015
Date Written: April 18, 2014
We consider a large trader liquidating a portfolio using a transparent trading venue with price impact and a dark pool with execution uncertainty. The optimal execution strategy uses both venues continuously, with dark pool orders over-/underrepresenting the portfolio size depending on return correlations; trading at the traditional venue is delayed depending on dark liquidity. Pushing up prices at the traditional venue while selling in the dark pool might generate profits. If future returns depend on historical dark pool liquidity, then sending orders to the dark pool can be worthwhile simply to gather information.
Keywords: Dark pools, Optimal liquidation, Adverse selection, Market microstructure, Illiquid markets
JEL Classification: C02, C61, G11, G12, G20
Suggested Citation: Suggested Citation