A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network. Transaction Cost and Market Share of the Crossing Network (June 9

Abstract

This paper examines the interaction between a stock exchange and a crossing network (dark pool) in which buy and sell orders are passively matched using the price set by the stock exchange. The results show that the crossing network harms price discovery and the relative lack of revealed information most strongly a¤ects stocks with high uncertainty in their funda-mental values. However, the crossing network may reduce the severity of the adverse selection problem in the exchange and increase its liquidity. I \u85nd that an increase in the uncertainty of the fundamental value of the asset increases the transaction costs in both markets, but stocks with higher fundamental value uncertainty are more likely to have higher market shares in the crossing network. In contrast to the results from previous studies, I \u85nd that an increase in liquidity trading in the crossing network may decrease execution probability. The impact of di¤erent allocation rules in the crossing network on market outcomes is also examined. JEL Classi\u85cation: G10 G2