Asymmetries in Dark Pool Reference Prices

Dark pools volumes have increased significantly over the last decade. This has raised concerns on the reliability of reference prices used by these pools, and asymmetric participant outcomes via “latency arbitrage”. Using a novel data set provided by the major UK exchanges and dark pools that contain millisecond matching engine timestamps we characterise the extent of stale reference prices in the UK for the first time. We find that HFTs benefit in the vast majority of stale trades and co-located participants more than non co-located. We also characterise the mechanism of dark pool latency arbitrage by demonstrating aggressive and passive initiation strategies and its relationship with participant dark liquidity provision. We also find evidence of better execution outcomes by broker's trading in their own dark pools and HFTs. Overall, we find evidence of asymmetric outcomes across participant types, which may result from participants' differing abilities to observe and manage latency, and differing abilities to engage in effective smart order routing in a fragmented market