Dark Pool Usage and Equity Market Volatility

An agent-based simulation is conducted to explore the relationship between dark pool usage and equity market volatility. We model an order-driven stock market populated by liquidity traders who have different, but fixed, degrees of dark pool usage. The deviation between the order execution prices of different traders and the volume weighted average price of the market is calculated in an attempt to measure the effect of dark pool usage on price volatility. By simulating the stock market under different conditions, we find that the use of the dark pool enhances market stability. This volatility-decreasing effect is shown to become stronger as the usage of the dark pool increases, when the proportion of market orders is lower, and when market volatility is lower.