Impact of Pinging in Financial Markets: An Agent Based Study

Sriram Bharadwaj Rangarajan, Carmine Ventre

Abstract: Institutional traders in the financial markets rely on hidden trading venues to execute significantly large trades with lower execution costs and reduced information leakage. One such trading venue, known as dark pool, offers institutional traders better execution costs through hidden order books and delayed trade reporting. Despite their advantages, dark pools are susceptible to market manipulation practices such as ’pinging’. Due to low transparency in dark pools, the incentives of pinging agents and their impact on market participants has not been studied in detail. In this paper, we present an agent-based model of the financial markets to study market impact of trading strategies and the dynamics of pinging in dark pools. We identify the scenarios and market conditions under which pinging is a profitable manipulation strategy and compute its impact on execution costs of informed institutional trading agents. Further, we consider agent incentives and use empirical game theory to c