Abstract
The availability of liquidity in dark pools raises questions about the adverse selection, market impact, and opportunity cost of executions into such pools. With the new method of modeling and estimating market impact exposed in this article, it is possible to better quantify some of those effects post-trade. This point of view conciliates the price formation process and the market impact measurement: price formation mainly comes from the market impact of each trade, visible or not. This fully endogenous method is able to capture the market context (as trends or high volatility). This interesting property allows one to compute the intrinsic market impact used during the performance analysis process.
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