Irene Aldridge research finds dark pools outperform lit exchanges and batch auctions

Irene Aldridge’s latest theoretical economics paper, submitted to arXiv on May 29, 2026, provides a rigorous game-theoretic comparison of 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 execution price, waiting costs, and transaction costs. The main result establishes that under moderate arrival rates and bounded adverse selection, dark pools achieve the highest aggregate ex-ante welfare. Observable order books, by contrast, create costly strategic timing games where traders delay or rush submissions to optimize queue position, generating wasteful social waiting costs. Opaque order books eliminate these timing games through information design, leading to the welfare ranking: W^DARK > W^LIT > W^BATCH.

The 79-page paper extends the analysis to incorporate asymmetric information and endogenous venue choice, formally characterizing equilibrium strategies in each mechanism. Aldridge demonstrates how the information structure and discipline of service jointly determine efficiency in strategic matching environments. This work has significant implications for market design, particularly for regulators and exchanges considering the role of transparency. It suggests that dark pools may be more socially efficient than often assumed, while batch auctions—despite recent advocacy—perform worst under the modeled conditions. The results challenge conventional wisdom that transparency always improves market quality, highlighting the hidden costs of strategic behavior in transparent order books.