Sabrina Buti

Diving Into Dark Pools

This paper examines unique data on dark pool activity for a large cross-section of US stocks in 2009. Dark pool activity is concentrated in large firms, stocks with high share volume, high price, low spreads, high depth, and low short-term volatility. NASDAQ (AMEX) stocks have significantly higher (lower) dark pool activity than NYSE stocks controlling for size, share volume, and price. For a given stock, dark pool activity is significantly higher on days with higher share volume, higher depth, and lower intraday volatility. Dark pool activity is significantly lower for days with larger order imbalances relative to share volume and larger absolute returns. We find no evidence supporting the hypothesis that dark pool activity has a detrimental effect on market quality.

Dark Pool Trading Strategies, Market Quality and Welfare

We model a financial market where traders have access both to a fully transparent limit order book (LOB) and to an opaque Dark Pool (DP). When a DP is introduced to a LOB market,orders migrate to the DP from the LOB, but overall trading volume increases. Moreover, inside quoted depth in the LOB decreases, but quoted spreads tend to narrow in deep books and widen in shallow ones. DP market share is higher when LOB depth is high, when LOB spread is narrow, when the tick size is large and when traders seek protection from price impact. When depth decreases on one side of the LOB, liquidity is drained from the DP. When Flash orders provide select traders with information about the state of the DP, more orders migrate from the LOB to the DP but overall market quality improves.

Sub-Penny and Queue-Jumping

Sub-Penny Trading (SPT) is a form of dark trading that allows traders to undercut displayed liquidity. We distinguish between SPT that is queue jumping (QJ) and mid- crossing (MID) and find that QJ is higher for NASDAQ than NYSE stocks. Consistently with Buti, Rindi, Wen and Werner (2013), QJ is positively related to depth and negatively related to stock price. We also find that QJ is associated with improved lit market quality, especially for large capitalization stocks. Sub-penny quotes are allowed for stocks priced below

Asset Choice Regulation in Mutual Funds

1.00, and we use this fact to show that QJ increases, the spread improves but depth deteriorates as the price of a stock crosses from above to below (

Undisclosed orders and optimal submission strategies in a limit order market

1.00).

Dark Pool Trading Strategies

Should the type of assets held by mutual funds be regulated? We investigate this issue in a costly state verification model, where the regulator determines the type of assets in which mutual funds can invest, fund managers select assets under this constraint, and investors can, at a cost, control the performance of the manager. The optimal level of risk for the portfolio reflects the following trade-off: On the one hand risky assets magnify the managers incentives to lie, on the other hand they enhance the incentives of the investor to monitor performance. We show that regulation helps protect investors by restricting the discretion of the fund manager.