Dark Pools

Definition:

A type of trading platform that allows large blocks of securities to be traded without the prices being revealed publicly until after the trades are complete. Neither the size nor price of the trade(s) nor the identity of securities or the purchasers are revealed until completion, which avoids market manipulation although this disadvantages some market participants executing trades on limited information. Dark Pools reduce market transparency but provide the possibility of price improvement and reduced transaction costs by crossing orders at the midpoint of the quoted best bid and offer prices, thereby saving on both the bid-offer spread and on exchange fees.

There are three major types of Dark Pool platforms: (i) independent companies that offer Dark Pool trading as a differentiated basis for trading; (ii) broker-owned Dark Pools where a broker’s clients interact anonymously; and (iii) public exchanges with their own Dark Pool platforms for clients to trade anonymously within an exchange “infrastructure.” Turquoise and Chi-X are the two major Dark Pool public exchanges.

Also referred to as Dark Liquidity or Black Pools.

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