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  • We wish to thank Ulrich Horst, Werner Kratz, Nicholas Westray, and the anonymous referees for useful suggestions and comments. We are also grateful to seminar participants at the University of Bonn, Humboldt University Berlin, and the Bachelier seminar Paris. This research was supported by Deutsche Bank through the Quantitative Products Laboratory.


We consider an illiquid financial market where a risk averse investor has to liquidate a portfolio within a finite time horizon [0, T] and can trade continuously at a traditional exchange (the “primary venue”) and in a dark pool. At the primary venue, trading yields a linear price impact. In the dark pool, no price impact costs arise but order execution is uncertain, modeled by a multidimensional Poisson process. We characterize the costs of trading by a linear-quadratic functional which incorporates both the price impact costs of trading at the primary exchange and the market risk of the position. The solution of the cost minimization problem is characterized by a matrix differential equation with singular boundary condition; by means of stochastic control theory, we provide a verification argument. If a single-asset position is to be liquidated, the investor slowly trades out of her position at the primary venue, with the remainder being placed in the dark pool at any point in time. For multi-asset liquidations this is generally not the case; for example, it can be optimal to oversize orders in the dark pool in order to turn a poorly balanced portfolio into a portfolio bearing less risk.