hard · Market Microstructure

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 flow reduces congestion and queue length, while the dark pool's adverse-selection exposure rises because any diverted flow mechanically increases its toxicity.
3. Both the lit spread and the dark pool's adverse-selection exposure are unchanged, because moving uninformed flow between venues is informationally neutral and only the informed-flow split matters for either venue.
4. The lit spread widens and the dark pool's adverse-selection exposure also rises, because thinner lit liquidity makes the informed migrate to the dark pool, raising toxicity there even as uninformed flow arrives.

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