B. Ende / J. Muntermann
No perfect market model for securities trading has been found yet which satisfies the needs of institutional and retail investors simultaneously. The predominant models are electronic exchanges performing an open order book approach. It is characterized by transparency and worldwide open access: prices and liquidity are openly advertized and investors can submit their trade intentions to the order book. While these characteristics are favorable to retail investors, they do not satisfy the requirements of institutional order flow. Institutional investors are trading large blocks of shares, which is sensitive to negative price movements. Thus, keeping trade identities and true trade intentions secret is of upmost importance for prominent investors. To achieve these goals, institutional investors might employ approaches, which adapt their large orders to the requirements to the open order book approach. Alternatively, they can also choose to route their orders to so-called dark pools of liquidity. These trading venues are specialized to trade large volumes anonymously. Therefore, their market model is based on opacity and exclusive access. In this paper, we investigate a major dark pool (Liquidnet Europe) and explore whether and how this approach can provide significant benefits. Therefore, execution prices from Liquidnet are compared to benchmark prices of the securities’ primary markets. Our results are twofold: firstly, our data shows the difficulty to find counterparties at dark pools. Secondly, if successful, trades at dark pools can provide significant benefits in terms of better execution prices.