What are dark pools?

Dark pools (or dark pools of liquidity) are trading venues through which institutional investors can anonymously place hidden orders. Illustratively, as the name suggests, dark pools can been seen as markets with no lights where investors cannot see what other investors wish to buy or sell – ie, where there is no pre-trade transparency. (Dark pools may also have limited or no post-trade transparency, but I guess what really matters for the definition of a dark pool is its absence of pre-trade transparency.)

Dark pools are used by institutional investors to trade securities in large quantities (commonly known as block trades) without having the strong market impact that it could have if traded at a regular exchange.

There are many and various types of dark pools, but frequently a dark pool has its trading prices referenced to the ones (usually the mid-quotes) dealt in a specific regular exchange.

Dark pools can be managed by:

• Independent providers (ex: Liquidnet);
• Broker-Dealers (ex: JP Morgan);
• Exchange operators (ex: NYSE).

Note that EU MIFIR has imposed limits on dark trading – for more information, check the following: MIFID2/MIFIR's war on dark trading, and the unintended rise of SIs.

Dark pool trading example with binding orders:

Dark pool trading example with indicative orders: