Price manipulation in a market impact model with dark pool
Abstract
For a market impact model, price manipulation and related notions play a role that is similar to the role of arbitrage in a derivatives pricing model. Here, we give a systematic investigation into such regularity issues when orders can be executed both at a traditional exchange and in a dark pool. To this end, we focus on a class of dark-pool models whose market impact at the exchange is described by an Almgren--Chriss model. Conditions for the absence of price manipulation for all Almgren--Chriss models include the absence of temporary cross-venue impact, the presence of full permanent cross-venue impact, and the additional penalization of orders executed in the dark pool. When a particular Almgren--Chriss model has been fixed, we show by a number of examples that the regularity of the dark-pool model hinges in a subtle way on the interplay of all model parameters and on the liquidation time constraint. The paper can also be seen as a case study for the regularity of market impact models in general.
- Publication:
-
arXiv e-prints
- Pub Date:
- May 2012
- DOI:
- 10.48550/arXiv.1205.4008
- arXiv:
- arXiv:1205.4008
- Bibcode:
- 2012arXiv1205.4008K
- Keywords:
-
- Quantitative Finance - Trading and Market Microstructure