Definition of dark pools

A dark pool  is the romantic – or sinister, depending on your viewpoint – name given to a network that allows traders to buy or sell large orders without running the risk that other traders will work out what is going on and put the price up, or down, to take advantage of the order. They have been criticised for their lack of transparency and because the inevitable fragmentation of trading could lead to less efficient pricing in traditional open stock exchanges. [1]


dark pool

In dark pools, pre-trade prices – the price at which shares are offered for sale – are not visible to anyone, even the participants in them, and the price at which shares change hands is only revealed after the trade is done. [2]



the purpose of dark pools

The primary purpose of dark pools is to minimise market impact. By restricting access to undesired market participants (such as high frequency trading firms), and by not revealing quotes, dark pools enable institutional investors to minimise their information leakage and realise more efficient executions. More specifically, dark trading facilities provide the possibility of price improvement and reduced transaction costs by crossing orders at the midpoint of the quoted best bid and offer prices, thereby saving on both the bid-offer spread and on exchange fees. For these reasons, dark pools have been popular for the execution of large block orders.[3]


the prevalence of dark pools

At the beginning of 2013 it was estimated that non-displayed trading accounted for a third of total volume in the US and dark pools about 13 per cent of total volume. A similar volume was said to be taking place in Europe. Rapid growth had been noted of about 50 per cent over the preceding three years in the US, while in Europe, trading in dark pools relative to order-book activity had more than doubled over the preceding two years.[4]


why trading in dark pools has been growing

Dark pools have become prevalent due to technological developments that have lowered costs allowing broker/dealers to route more of the order flow they handle to their own private pools first before sending unwanted orders to the public markets.[5]



dark pools in the news

In the US in April 2013, chief executives of NYSE Euronext, Nasdaq OMX and BATS Global Markets argued for regulators to introduce rules permitting transactions to only take place away from a public exchange if a customer is getting a much-improved price. They pointed to similar steps taken by Canadian and Australian regulators to combat the rise of off exchange trading, otherwise known as dark pools.

In June 2014, New York's top securities regulator sued Barclays for allegedly favouring high speed traders in its "dark pool".

The complaint was set to increase the pressure on other dark pool operators such as those run by Credit Suisse, Bank of AmericaGoldman Sachs and Morgan Stanley to provide investors with more information about how they operate. In recent months, some dark pools had begun voluntarily publishing more information on how they work.