Dark Pools - Uncovered

The Economist published a blog on their website covering the rise of dark pools both in the US and European equity markets. As they relate, dark pools were created to “allow institutional investors, who manage huge investment portfolios, to take or dispose of sizeable positions in a company’s shares without suffering adverse price movements as they carry out the trade.”

The article runs through the history of dark pools and the evolution from a crossing platform attached to an exchange to a for-profit offering by broker/dealers. Today, there are over 50 dark pools that account for an estimated 12.5% of all trading in US equities. Dark pools have the ability to bring together large blocks of institutional volume while keeping the players identities and intentions secret. That can be both a good and bad thing. For a large institutional investor, they get the benefit of not tipping their hand to anyone else in the market. For an issuer, the anonymity means there’s almost no way to know who is getting into or out of your stock.

If you want to get a better understanding of dark pools, read the Economist blog or call your NYSE rep. Given it’s prominence in equity trading, it pays to understand how it works. 

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