Dark pool trading strategies, market quality and welfare

Abstract

We show that when a continuous dark pool is added to a limit order book that opens illiquid, book and consolidated Öll rates and volume increase, but spread widens, depth declines and welfare deteriorates. The adverse e§ects on market quality and welfare are mitigated when book-liquidity builds but so are the positive e§ects on trading activity. All e§ects are stronger when tradersívaluations are less dispersed, access to the dark pool is greater, horizon is longer, and relative tick size larger