Online Appendix of “Do Dark Pools Harm Price Discovery?”

In this section, I discuss institutional details of dark pools and dark liquidity in addition to that in Zhu (2013). Dark pools differ from each other in many ways. We can categorize them, roughly, into the three groups shown in the top panel of Table 1. As described in Zhu (2013), the first group match customer orders by acting as agents (as opposed to trading on their own accounts). Transaction prices are derived from lit venues, such as the midpoint of the National Best Bid and Offer (NBBO) and the volume-weighted average price (VWAP). Within the second group, dark pools operate as continuous nondisplayed limit order books, accepting market, limit, or “pegged” orders. This group includes many of the dark pools owned by major broker-dealers, including Credit Suisse Crossfinder, Goldman Sachs Sigma X, Citi Match, Barclays LX, Morgan Stanley MS Pool, and UBS PIN. Unlike Group-1 dark pools that execute orders at the market midpoint or VWAP, Group-2 dark pools derive their own execution prices from the limit prices of submitted orders. Price discovery can therefore take place. Another difference is that Group-2 dark pools may contain orders from proprietary trading desks of the broker-dealers that operate the dark pools. In this sense, these dark pools are not necessarily “agency only.” Dark pools in the third group act like fast electronic market makers that immediately accept or reject incoming orders. Examples include Getco and Knight. Like the second group, transaction ∗MIT Sloan School of Management, 100 Main Street E62-623, Cambridge, MA 02142. [email protected]. Pegged orders are limit orders with the limit price set relative to an observable market price, such as the bid, the offer, or the midpoint. As the market moves, the limit price of a pegged order moves accordingly.