Dark pool

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In finance, a dark pool (also black pool) is a private forum (alternative trading system or ATS) for trading securities, derivatives, and other financial instruments.^[1] Liquidity on these markets is called dark pool liquidity.^[2] The bulk of dark pool trades represent large trades by financial institutions that are offered away from public exchanges like the New York Stock Exchange and the NASDAQ, so that such trades remain confidential and outside the purview of the general investing public. The fragmentation of electronic trading platforms has allowed dark pools to be created, and they are normally accessed through crossing networks or directly among market participants via private contractual arrangements. Generally, dark pools are not available to the public, but in some cases, they may be accessed indirectly by retail investors and traders via retail brokers.

One of the main advantages for institutional investors in using dark pools is for buying or selling large blocks of securities without showing their hand to others and thus avoiding market impact, as neither the size of the trade nor the identity are revealed until some time after the trade is filled. However, it also means that some market participants—retail investors—are disadvantaged, since they cannot see the orders before they are executed. Prices are agreed upon by participants in the dark pools, so the market is no longer transparent.^[3]

Dark pools are heavily used in high-frequency trading, which has also led to a conflict of interest for those operating dark pools due to payment for order flow and priority access. High frequency traders may obtain information from placing orders in one dark pool that can be used on other exchanges or dark pools.^[4] Depending on the precise way in which a "dark" pool operates and interacts with other venues, it may be considered, and indeed referred to by some vendors, as a "grey" pool.^[5]

These systems and strategies typically seek liquidity among open and closed trading venues, such as other alternative trading systems. Dark pools have grown in importance since 2007, with dozens of different pools garnering a substantial portion of U.S. equity trading.^[6] Dark pools are of various types and can execute trades in multiple ways, such as through negotiation or automatically (e.g., midpoint crosses, staggered crosses, VWAP, etc.), throughout the day or at scheduled times.^[6]