Sharks in the Dark : Quantifying Hft Dark Pool Latency Arbitrage

We investigate stale reference pricing and liquidity provision in dark pools using proprietary, participant-level regulatory data. We show a substantial amount of stale trading occurs, imposing large adverse selection costs on passive dark pool participants. Consistent with these costs, HFTs almost never provide liquidity in the dark, instead frequently consuming liquidity, in particular in order to take advantage of stale reference prices. Finally, we examine market design interventions aimed at countering dark pool latency arbitrage and show that only mechanisms that protect passive dark liquidity are effective in achieving this goal