Template-Type: ReDIF-Paper 1.0
Author-Name: Matteo Aquilina
Author-X-Name-First: Matteo
Author-X-Name-Last: Aquilina
Author-Name: Sean Foley
Author-X-Name-First: Sean
Author-X-Name-Last: Foley
Author-Name: Peter O'Neill
Author-X-Name-First: Peter
Author-X-Name-Last: O'Neill
Author-Name: Matteo Thomas Ruf
Author-X-Name-First: Thomas
Author-X-Name-Last: Ruf
Title: Sharks in the dark: quantifying HFT dark pool latency arbitrage
Abstract: We investigate stale reference pricing and liquidity provision in dark pools using proprietary, participant-level regulatory data. We show a substantial amount of stale trading occurs, imposing large costs on passive dark pool participants. Consistent with these costs, HFTs almost never provide liquidity in the dark, instead frequently consuming liquidity, in particular in order to take advantage of stale reference prices. Finally, we show that market design interventions randomizing dark execution times are successful at countering dark pool latency arbitrage, protecting passive providers of dark liquidity. Our results have substantial implications for practitioners and policymakers aiming to improve liquidity provision in dark pools.
Creation-Date: 2023-08
File-URL: https://www.bis.org/publ/work1115.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1115.htm
File-Format: text/html
Number: 1115
Keywords: high-frequency trading, dark pools, latency arbitrage, stale quotes, reference prices
Classification-JEL: D47, G10, G14
Handle: RePEc:bis:biswps:1115