Large players, such as investment companies, at times will use dark pools to execute their securities trades. Many times these large money managers want to hide their securities orders. These large players may not want others to see their activity. They are keeping their trading in the “dark”. The reason they may decide to hide their activity is so the large investor can hopefully get a better price using a dark pool than using a traditional exchange when they are buying and selling their securities.

Dark pools were known previously as “upstairs trading”. These dark pools are regulated by FINRA, and registered with the Securities and Exchange Commission. They are audited on a continuing basis.

A large player can use a dark pool to remain less exposed to the public. Dark pools enable large players to block trade in a more secretive manner. They were created back in the late 1980's.

“A block trade, also known as a block order, is an order or trade submitted for the sale or purchase of a large quantity of securities. A block trade involves a significantly large number of equities or bonds being traded at an arranged price between two parties, sometimes outside of the open markets, to lessen the impact on the security price. In general, 10,000 shares of stock, not including penny stocks, or $200,000 worth of bonds are considered a block trade,” as defined by Investopedia.

If a large player floods the market with a large trade of a particular security in a traditional exchange, investors may notice their activity due to the large size. Items such as volume and the volume histogram on a chart could indicate large trades are being executed in a traditional exchange which is open to the public eye. The traders in the traditional exchange would know a large investor is executing trades. This could be detrimental for a large money manager to secure the best price.

A listing of some dark pools as supplied by Wikepedia can be found here: List of Dark Pools.

Dark pools are not limited to block trades and large investors, as stated recently in an article at “Dark pools are not generally venues for big orders anymore — one study found that the average order size is now just 200 shares.” Bloomberg Article on Dark Pools.

“Non-exchange trading in the U.S. has surged in recent years, accounting for about 40% of all U.S. stock trades in 2014 compared with 16% six years ago”. Investopedia Quote on Dark Pools.

As you can see, dark pools can benefit large traders as well as moderate size traders.

If you are a trader who uses traditional exchanges and use volume as an indicator, you may not be seeing all the volume being traded due to dark pools. As you have learned from this article, dark pools are more secretive, therefore you may not be seeing all the trading activity on the security you are trading.

There are many tools available within the markets to increase the odds of success. Go to Capital Discussions to learn from some of the best traders on the planet.

“I just joined and I'm very impressed. Knowledgeable individuals sharing freely, and helping those who could use some direction. Actionable trading ideas are discussed, dissected, archived and available to download. I think you guys have a great service. I’m glad that I found you. I plan to be a member for a long time. Keep up the great work. Thanks.”
Ralph D. – Cromwell, CT

Feel free to comment below.