Dark liquidity

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In finance, dark pools of liquidity (also referred to as dark liquidity or simply dark pools) is trading volume or liquidity that is not openly available to the public.[1] The bulk of these represent large trades by financial institutions that are offered away from public exchanges so that trades are anonymous. The fragmentation of financial trading venues and electronic trading has allowed dark pools to be created, and they are normally accessed through crossing networks or directly between market participants.

One of the main advantages for institutional investors in using dark pools is for buying or selling large blocks of securities without showing their hand to others and thus avoiding market impact as neither the size of the trade nor the identity are revealed until the trade is filled. But it also means that some market participants are disadvantaged as they cannot see the trades before they are executed; prices are agreed upon by participants in the dark pools, so the market becomes no longer transparent.[2]

There are three major types of dark pools. The first type is independent companies set up to offer a unique differentiated basis for trading. The second type is broker-owned dark pools where clients of the broker interact, most commonly with other clients of the broker (possibly including its own proprietary traders) in conditions of anonymity. Finally, some public exchanges are creating their own dark pools to allow their clients the benefits of anonymity and non-display of orders while offering an exchange ‘infrastructure’. Depending on the precise way in which a ‘dark’ pool operates and interacts with other venues it may be considered, and indeed referred to by some vendors as a ‘grey’ pool.[