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

Abstract

This paper extends the Kyle (1985) framework to allow both endogenous price and endogenous execution probability. I use the model to examine the market outcome when the informed trader can split trades between an exchange and a crossing network (dark pool). The crossing network reduces price discovery and volatility. The impact is stronger for stocks with higher fundamental value uncertainty. An increase in the fundamental value uncertainty is found to increase the price impact in the exchange and non-execution probability in the crossing network, but creates a comparative advantage for the crossing network, as well as increasing its market share.