Title: Welfare analysis of dark pools
Speaker: Krishnamurthy Iyer, Cornell University
Date and Time: 3:00 pm on Monday, June 8
Venue: Room 217, Mechanical Engineering
Abstract: We investigate the role of a class of alternative market structures known as electronic crossing networks or "dark pools". In contrast to traditional "lit" markets, which are often intermediated by dealers and market-makers and where the liquidity is observable, dark pools operate via direct matching between traders and the liquidity in the dark pool is hidden. Relative to the lit markets, dark pools offer investors the trade-off of reduced transaction costs in exchange for greater uncertainty of trade. We study a market with intrinsic traders and speculators, each endowed with heterogeneous fine-grained information, who endogenously choose between dark and lit venues. We solve for an equilibrium in this setting, and address three main questions: First, we illustrate how this choice between the two venues depends critically on the information available to each trader. Second, we establish that while dark pools attract relatively uninformed traders, they still experience adverse selection. Finally, with a competitive dealer market, we show that the introduction of a dark pool can lead to greater transaction costs in the lit market and can decrease the overall market welfare.
Joint work with Ramesh Johari, Stanford University and Ciamac C. Moallemi, Columbia Business School.
Speaker bio: Krishnamurthy Iyer is an Assistant Professor in the School of Operations Research and Information Engineering at Cornell University. He received his PhD from the Department of Management Science and Engineering at Stanford University in 2012, and his B.Tech and M.Tech (dual degree) in
Mechanical Engineering at the Indian Institute of Technology, Bombay in 2006. His research interests include game theory, dynamic markets, stochastic modeling and market microstructure.