Dark Pool Trading

Dark pool trading is the volume of institutional trading orders not available to the public. Most dark pool trades are done on anonymous block trades separate from the rest of the market and away from the public. As such, dark pool trading has a lesser impact on the market because the release of trade details is not required until after the trade is complete.

When it comes to understanding and utilizing dark pool trade systems, information is important. According to a recent article in ITWorld, there are over 40 such systems currently functioning in the United States.

There are three areas of dark trade systems – independent trade systems, which are established to create a separate trading basis; broker-owned, which created when a broker’s clients are allowed to create and access the pool anonymously, and public exchange, which is an exchange infrastructure is established but anonymity is allowed and orders are not displayed.

The dark pools are part of the national consolidated tape and are marked as over-the-counter. Over-the-counter transactions do not have to be reported to clients unless the crossing network desires to release the information or companies are under contractual obligation to inform clients.

The primary feature of these so-called pools is non-advertised liquidity, which means that the movement of the pool affects the market less since the motion is not transparent. Many investors like these kind of trades because their actions are not evident to others and their identity is not revealed. In addition, the transaction costs are traditionally less.

One of the biggest benefits to the system is that large equity blocks move quietly without affecting the price or the information network at large. This is most commonly utilized by institutional investors seeking to make a large block order without tipping their hand to global investors, which might in turn affect the price of the security. However, the silent nature of the transaction ends once the order is executed, as regulations then require release of the information to the public. Examples of institutional investors include pension funds and mutual fund companies.

These kinds of trades happen on specific trading platforms that automatically track other pools, exchanges and networks for price information. Some software only shows interested firms orders that specifically match their desired sell or buy characteristics in order to reduce overall chatter about the pool.

It is important to note that other investors may still sell or buy their stocks in advance if they catch wind of a particular dark pool trade.

According to Investopedia.com, dark pools constituted almost 10 percent of equity trade volume in the U.S. in 2008. As dark pool trades grow in size, the Securities and Exchange Commission is starting to feel concern that publicly displayed securities quotes are inaccurate due to the large volume of trading that is happening off the exchange. As such, do not be surprised to see dark pool trading changing the game more and more as the trend grows.

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