In the current state of the market, making such trades tend to be time-consuming and price devaluing. And that’s when the power of dark pools comes into play.
If dark pools trading is completely a foreign word to you, we’ve got you covered. In this article, we’ll focus on just how much you’ll benefit by making your large exchanges through dark trading pools.
So what is dark pool trading?
Read on, and we’ll tell you more than just that.
What Is a Dark Pool?
A Dark Pool is a kind of Alternative Trading System (ATS) that allows for a private non-exposure trading process.
This forum or exchange for trading securities makes it possible for investors to place orders and trades without revealing their intentions or identity to the public.
The purpose of this type of stocks trading is to supply additional anonymity and liquidity in the trading world. It injects pricing and cost advantages through multi-type funds and benefits.
In addition, it is important to note that the Securities and Exchange Commission (SEC) backs dark pools trading. So regardless of how much the public considers it a dubious enterprise, it still is legal.
How it Works
In 1980, the SEC began to allow brokers to trade large blocks of shares. This event, along with the rise of Electronic Trading, allowed a pathway for dark pool trading to thrive in 2005.
Dark trading pools are private exchanges that offer institutional investors extensive benefits. These include lower fees in comparison to exchanges that are backed by banks since they are housed within large firms instead.
The large block trades made within black pools do not include any form of exposure during the trader-finding process. This prevents heavy price devaluation, which is the devaluation of an exchange through the time it takes for the investor to find a buyer.
Examples of Dark Pools
One of the dark pool trading examples would be when a large company sells a big chunk of its shares through a private exchange to avoid media attention.
This tends to be a clever move from the company. And that’s because a large trade will occur without causing a negative impact on the company or any devaluation to the trade.
So the tendency is that the public will only find out about the trade once it has already been closed.
The types of dark trading pools depend on the gravity of the trade. There are brokers or dealer-owned exchanges, independently-owned exchanges, and private exchanges.
Dark Pools and High-Frequency Trading
High-Frequency Trading (HFT) has dominated the trading market with its technology that allows institutional investors to execute their orders of shares ahead of others.
This means that any investor under HFT would be able to trade large blocks of shares while capitalizing on the prices of said shares.
However, this technology became so pervasive that the execution of large trades became almost impossible through a single process. In response to this crisis, investment banks introduced dark pools trading to ensure liquidity and lessen the transparency.
Through trading dark pools, exchanges of large blocks without publicization and attracting the attention of HFT is made possible.
Advantages of Dark Pools
The major advantage of this type of trading would be limiting the market impact on the exchange. Besides, this is the reason dark pools trading exists in the first place, so it only makes sense for it to make an effect.
Since the market requires absolute transparency between exchanges, there is almost always a negative impact on large trading investors.
In contrast to this disadvantage, dark pools makes large stock trading with zero market impact possible.
And, of course, the crowd’s favorite, better prices, and lower costs.
The dark trading pools are only for large investors. It is exclusive to massive amounts of orders and exchanges. This allows for more ideal prices in comparison to public exchanges. So it is pretty much a win-win for both sides; the buyer and the seller benefits both ways.
Plus, all trades done through dark pools obliterate exchange fees. This not only increases significant cost savings but also reduces the costs of the spread itself.