Dark pools are online platforms for secret trading in which a limited number of businesses and investors transact discreetly on a range of securities, including stocks, currencies, commodities, and other asset classes.
SEC oversees these markets to stop manipulation and predatory behaviour. Dark pools are extremely popular with big investors for a variety of reasons. However, they have their fair share of disadvantages. Let’s explore.
The Fundamentals
Only large banks, financial institutions, hedge fund firms and big investors that transact in volume and move millions of dollars in assets and funds may use this trading channel. A block transaction in the dark pool is defined by the SEC as trading more than 10,000 shares in the stock market or transferring tradable asset(s) valued at least $200,000.
These transactions comprise about 40% of all US stock market trading, far greater than the abovementioned prerequisites.
Strengths and Weaknesses
These pools have several benefits despite their secretive nature. There are a number of benefits to concealing bulk trade information from public markets, including increased liquidity, reduced trading spreads, privacy, and no effect on open markets.
If investors or companies wish to trade without affecting their market standing, these channels are great options to purchase or sell large asset quantities.
On the other hand, this trading channel has long been a target of scrutiny and distrust from the general public. After all, this mechanism allows large companies and investors to conduct business in complete darkness, leaving the average traders unaware of the market changes.
Therefore, many believe that this way of trading is ethically wrong and could lead to some negative consequences for retail investors and the general public.
The Bottom Line
By averting extreme market swings that would arise following the execution of large orders and guaranteeing companies anonymity from their rivals, trading in dark pools provides certain advantages to the public market. However, they also minimise transparency and public trust, which could lead to negative consequences in the long run.
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