Dark Pool

On public exchanges, orders are visible in the order book. Large institutional investors worry that revealing big orders will move prices against them before they can complete their trades. Dark pools allow them to trade large blocks of shares without showing their intentions in advance.

Dark pools are operated by banks, brokers and independent firms. Trades are matched privately, often at prices based on public exchange prices, such as the midpoint between the best bid and offer, and are reported after execution.

For example, a pension fund wanting to sell 2,000,000 shares might use a dark pool to find buyers without revealing to the market that a large sell order exists, which could otherwise push the price down.

Dark pools account for a significant share of trading in many markets. Critics argue they reduce transparency, harm price discovery and can allow conflicts of interest or unfair advantages for some participants. Regulators have imposed rules, such as limits on dark trading in Europe, and fined operators for misleading clients.