Dark Pools: What You Need to Know

Dark pools are a hot topic among investors, and we’ve gotten a lot of questions on them. That’s why we’ve put together this ultra short guide to dark pools so you understand the basics.

What are Dark Pools?

Dark pools are Alternative Trading Systems (ATS) where investor trade blocks of shares away from traditional exchanges like the New York Stock Exchange and Nasdaq.

These blocks are privately exchanged, so prices and volumes are not disclosed to the public until 7 business days after the trade is executed.

The SEC approved dark pools in the 1980s, and they have exploded in growth . Today, over 40% of trades are down via dark pools. and since 2007 has grown significantly. Today over 

Why Do Dark Pools Exist?

Institutions use dark pools to prevent the public from seeing mass buying or selling. 

The dark pools allow big investors to cover up their tracks.

Types of Dark Pools

Types of Dark Pools

There are several types of Dark Pools:

1. Broker Dealer: Uses payment for order flow to set prices. (Most popular)

2. Agency Broker: Prices set by exchanges at the highest bid (national best bid offer)

3. Independent companies: set up their own method. (Less common)

Some of the largest Dark Pools include Barclays LX, Instinet, Liquidnet, and NYFIX Millenium.

Are Dark Pools Good or Bad?

This is a hard question to answer.

On one hand, hiding certain large trades from the public may prevent retail traders from becoming overly excited by large block trades in particular stocks.

But one could argue Dark Pools contain a major conflict of interest.

Dark pools are hidden from the public on only the parties involved are aware of the trading volumes taking place. So by trading through dark pools, certain investors have more information about trading volume than others.

What Do You Think of Dark Pools?

Are they good? Bad? Let us know what you think in the comments below!