What Is A Dark Pool
Dark pools are defined as alternative trading systems (ATS) designed to handle large transactions for institutional investors. These “dark pools” were created to take trades of larger buyers and sellers prepared to trade blocks of stock instead outside traditional markets. The goal was to avoid dramatically impacts on the market. Ideally, dark pools focus on lessening the blow that a large retail order could have if made in the open market.
Thanks to the rise of interest from retail traders in stocks like AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME) – both former penny stocks – the veil of mystery is starting to lift on dark pools. Where the “Apes” see these as a means for market manipulation and “hiding” transactions, the mechanics of dark pool trading would appear to support a less volatile market environment.
According to the Securities & Exchange Commission, “Dark pools are trading systems that allow their users to place orders without publicly displaying the size and price of their orders to other participants in the dark pool.”
How Dark Pools Work
This won’t be a whole history lesson. But it’s important to know how dark pool liquidity and dark pool trading have come about. It became popular among institutional investors and has become more commonplace thanks to algorithmic and high-frequency trading. With institutions relying more heavily on robotic trading, dark pools offer a way for facilitating larger trades where liquidity is readily accessible and where the active retail market won’t exactly “feel” the transaction.
Things can be more “efficient” in a dark pool by allowing big trades to execute without dealing with day-to-day market traffic. They also offer a way to submit orders without revealing certain transaction factors to the public, hence “dark” liquidity pools. As a result, retail traders heavily criticize dark pools as they generally offer limited access to the institutional level. Furthermore, trades take place on private exchanges.
The Problem
For example, in high-frequency trading, a larger order may need to be spread out among multiple exchanges in a retail market. This could lead to some traders seeing the larger trades and immediately reacting in kind. Ultimately, something like this could lead to increased levels of volatility and, in turn, sway the market to certain extremes. Granted, something like this could happen within a matter of seconds, but it could happen all the same.
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The Dark Pool Solution
To solve this problem, institutions set up “private exchanges” to facilitate larger trades and bypass this “market risk” of increased volatility and speculation. The ATS or “dark pools” have become an avenue for block trades without blowback from the standard market. However, like many things hidden from the masses, Dark Pools have facilitated questionable transactions. For this reason, they’ve come into question by the likes of the retail trading masses. Most notably, Dark Pool activity related to AMC stock brought out the bad side of this market tool.
The Securities & Exchange Commission has brought numerous proposals to fix some loopholes. For example, in the wake of the AMC/GME volatility, SEC Chairman Gary Gensler issued a statement citing areas of importance for further study by the Commission. In particular, Gensler referenced the SEC’s “Staff Report on Equity and Options Market Structure Conditions in Early 2021*” paper discussing all things “meme” and more.
One of these areas concerned “wholesalers and trading in dark pools” and particular dynamics of short selling. The statement from the October 2021 report discussed:
“Much of the retail order flow in GME was purchased by wholesalers and executed off-exchange. Such trading interest is less visible to the wider market—and payments to broker-dealers may raise questions about the execution quality investors receive. Further, though wholesalers increasingly handle individual investor order flow, they face fewer requirements concerning their operational transparency and resiliency as compared to exchanges or ATSs.”
When Dark Pools Are Useful
As with many things abused for their loopholes, there are plenty of actual cases where Dark Pools can be relevant for their primary purpose. Despite the lack of transparency, block trades during normal market conditions can see speculation play a more significant role than fundamentals. Like stocks with unusual options activity, block trades only tell traders a few things. But they rarely tell the whole story.
In the unusual options volume example, the initial sentiment might suggest underlying bullishness if there’s unusually high Call volume at a specific strike price. However, what’s to say the trader placing that trade isn’t shorting the stock and using Call options to hedge their position if a stock aggressively reverses course ahead of expected earnings or FDA news? By simply looking at that volume, you wouldn’t necessarily derive that idea based on numbers alone.
Similarly, when it comes to dark pool trading, the face value of the numbers is only a piece of the puzzle. Since banks and brokers prefer them, they’re helpful in avoiding fees for larger trades otherwise encountered in the retail market.
Large buyers and sellers can also anonymously trade through matching with another participant in the dark pool. Since there isn’t an actual order book, dark pool traders have a chance of fulfilling these larger trades without sparking a significant price move. This could offer a way for them to achieve better gains and incur a lower total cost of placing a trade.
Once the purchases are made, the purchase, for example, would be appropriately reported via a filing. Whether it’s noted as a dark pool or regular market trade, it generally wouldn’t be indicated.
Retail Traders Are Left Out
Dark pool liquidity is limited to larger institutions. So retail, in general, is shut out. Certain bodies of traders assume that dark pool liquidity might remove actual liquidity from the overall market. As dark pools become more popular, institutions may utilize them more frequently. Therefore it has remained a reason why transparency has become such a hot topic.
But it isn’t just a 2023 issue related to Dark Pools; this has been ongoing. Look at the conversation had with SEC Chair Gary Gensler from October 2021, discussing issues that he was and is trying to tackle:
Gensler stated, “If you place a retail market order…the vast majority of those don’t go to the transparent lit market, they go to the dark market; these pools that are not competing.” He also explained that “when trading is being purchased and sent to one wholesaler or another wholesaler, they have information that the rest of the market may not have, at least for a short period…even milliseconds matter in these markets…from a policy perspective we want to look at that and how we instill greater competition in essence for that data as well as for that order flow.”
List Of Dark Pools
Just because dark pools are not national securities exchanges, it doesn’t mean you can’t find out more details about them. In fact, according to the SEC, an Alternative Trading System can apply to become a national exchange if it elects to. The Exchange also provides a monthly list of Dark Pools – an Alternative Trading System (“ATS”) List – on its site.
Here is the most recent list of Dark Pools, which totals 64. This list includes “Full Name of Alternative Trading System (as provided in item 1.A. of Form ATS)” as posted by the Securities & Exchange Commission. (download April’s PDF list of dark pools):
Dark Pools As Of April 2023
| ABE ATS |
| Arbor Research and Trading LLC |
| Automated Equity Finance Markets, |
| Bonds.com |
| BGC Financial L.P. |
| BrokerTec |
| CartaX |
| Cicada ATS |
| ClearList LLC |
| CPGO Secondary Market |
| Dash Financial Technologies LLC |
| Dealerweb, Inc. |
| EquiLend LLC |
| EQX LLC |
| Figure ATS |
| Forge Markets |
| FNC AG Stock, LLC |
| GFI Securities LLC |
| GFI Securities LLC |
| GLMX Technologies, LLC |
| Global OTC |
| Hiive Markets Limited |
| HTD-ATS |
| ICE Bonds Securities Corporation |
| ICE Bonds Securities Corporation |
| IDX Markets |
| Interactive Brokers LLC |
| InvestX Markets LLC |
| INX Securities, LLC |
| IOI Capital and Markets, LLC |
| Linqto Capital, LLC ATS |
| LODAS Securities Alternative Trading System |
| KopenTech Capital Markets |
| LedgerEdge Securities, Inc. |
| Liquidly IAS, LLC |
| Liquidnet Fixed Income ATS |
| M Share Capital LLC |
| MarketAxess ATS |
| MBS Source eTrading, Inc. |
| MuniAxis ATS |
| NFSTX, LLC |
| North Capital Private Securities |
| NPM Securities, LLC |
| Oasis Pro Markets, LLC |
| OTC Link ECN |
| OTC Link LLC |
| OTC Link NQB IDQS |
| Prometheum Ember ATS Inc. |
| Provable Markets LLC |
| REALCADRE LLC |
| The Rialto MarketBoard |
| SecondRE Markets LLC |
| Securitize Markets ATS |
| ShareNett ATS |
| SI Securities, LLC |
| Silicon Prairie Capital Partners LLC |
| StartEngine Secondary |
| Templum Markets LLC |
| TEXTURE ATS |
| TP ICAP Global Markets Americas |
| TP Trading Systems |
| Tradeweb Direct LLC |
| Trumid ATS |
| tZERO ATS, LLC |
| Variable Investment Advisors, Inc. ATS (VIA-ATS) |
| Wall Street Access |
| Zanbato ATS |
| Ziv Investment Company |
End Notes:
*Staff Report on Equity and Options Market Structure Conditions in Early 2021 – https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf
