medium · Market Microstructure adverse-selection

Holding the informed-trader population unchanged, what is the first-order effect on the lit book's quoted spread and on the dark pool's adverse-selection exposure?

1. The lit spread widens because the lit book retains the same informed flow against a thinner uninformed base (higher informed concentration), while the dark pool's adverse-selection exposure falls because it newly absorbs disproportionately uninformed flow that improves its execution mix.
2. The lit spread narrows because removing marginal flow reduces book congestion and the average queue length for remaining participants, while the dark pool's adverse-selection exposure rises because any diverted order flow mechanically raises its overall execution toxicity.
3. Both the lit spread and the dark pool's adverse-selection exposure remain unchanged, because moving uninformed flow between venues is informationally neutral in aggregate and only the informed-flow split, never its uninformed counterpart, matters for either venue's equilibrium pricing.
4. The lit spread widens and the dark pool's adverse-selection exposure also rises in tandem, because thinner lit liquidity makes the informed traders migrate toward the dark pool as well, raising its toxicity even as fresh uninformed flow simultaneously arrives there from the newly imposed cap.

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