Dark Pool Exclusivity Matters

Abstract

Recent dark pool proliferation has magnified regulatory and academic concerns about equal access and market quality implications. Some dark pools, hoping to create an environment more amenable to buy-side institutional investors, craft their rules to discourage – or even exclude – brokers, high frequency traders and order-flow-information traders. We examine the role participation constraints play in large trade execution and find that a dark pool targeting buy-side counterparties experiences less serial correlation in returns, less volume and volatility increase pre-trade, and more trade clustering within and across days. Exclusivity influences execution quality. Not all dark pools are created equal.