arXiv 29 May 2026 · Theoretical Economics
arXiv:2605.31072 · PDF · DOI · OpenAlex · Extracted main text
We develop a game-theoretic framework that compares welfare efficiency across three market mechanisms: continuous double auctions with transparent order books (lit exchanges), opaque order books (dark pools), and periodic batch auctions. Each mechanism is modeled as a queuing system where heterogeneous traders face trade-offs between the execution price, waiting costs, and transaction costs. Our main result establishes that under moderate arrival rates and bounded adverse selection, dark pools dominate both alternatives in aggregate ex-ante welfare. Observable order books create costly strategic timing games in which traders delay or rush submissions to optimize their position in the queue, generating wasteful social waiting costs. Opaque order books eliminate these timing games through information design. We formally characterize the equilibrium strategies in each mechanism and prove the welfare ranking $W^{DARK} > W^{LIT} > W^{BATCH}$. Extensions incorporate asymmetric information and endogenous venue choice. The results demonstrate how the information structure and the discipline of the service jointly determine efficiency in strategic matching environments.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Che, Yeon-Koo and Tercieux, Olivier (2021) Optimal Queue Design | 1.000 | 10 | 4 | 100% |
| 2 | Leshno, Jacob D (2022) Dynamic Matching in Overloaded Waiting Lists | 1.000 | 9 | 4 | 100% |
| 3 | Zhu, Haoxiang (2013) Do Dark Pools Harm Price Discovery? | 1.000 | 8 | 5 | 100% |
| 4 | Budish, Eric and Cramton, Peter and Shim, John (2015) The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response * | 1.000 | 6 | 3 | 100% |
| 5 | O'Hara, Maureen (1998) Market Microstructure Theory | 0.928 | 4 | 4 | 100% |
| 6 | ESMA (2026) Call for Evidence on the Market Structure of European Equity Markets | 0.811 | 4 | 2 | 100% |
| 7 | Cont, Rama and Stoikov, Sasha and Talreja, R (2010) A Stochastic Model for Order Book Dynamics | 0.644 | 2 | 2 | 100% |
| 8 | Iyer, Krishnamurthy and Johari, Ramesh and Moallemi, Ciamac C (2014) Information Aggregation and Allocative Efficiency in Smooth Markets | 0.511 | 2 | 1 | 100% |
| 9 | Leshno, Jacob D (2022) Dynamic Matching in Overloaded Waiting Lists | 0.511 | 2 | 1 | 100% |
| 10 | Aldridge, Irene (2009) High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems self | 0.405 | 1 | 1 | 100% |
Showing the top 10 of 17 scored citations.