What is Dark Pool Trading? Dirty Little Secrets of Algorithmic Trading

Trading concepts

dark pool trading

AMC investors have been talking about dark pool activity recently as trading volume seems elevated. Dark pool dealing has an impact on AMC stock, according to Wall Street Memes.

In recent years, dark pools have grown to become a major element of the global equity markets, and they have become an important competitor and alternative to traditional stock exchanges.

A dark pool confuses investors because of rampant rumors, which isn’t surprising. The name alone should frighten anyone interested in them.

What Is a Dark Pool Trading?

Daily, you can execute big trades in equity, securities, and international currencies in parallel markets or dark pools. The public, as well as additional shareholders in the dark pool, are unaware of them.

Despite its global reach, institutional trading can have a tremendous influence; the policies and amounts of securities can move entire markets during trading. We’ll discuss how dark pools work and how they affect your portfolio below.

To reduce this force, do institutional trading in confidence on private ATS, known as “dark pools.”

Uses of Dark Pools

Historically, dark pool trading was used mainly by institutional investors who did not want public exposure to the positions they were taking, in case other investors decided to move in before them.

The term “front-running” refers to an investor who enters a position before the completion of a block trade and can benefit from the subsequent price movement.

Investing in these has become much more common today. A form of trading that no human input gets in the way is algorithmic trading and high-frequency trading (HFT). In seconds, the computer programs will execute huge block trades ahead of other investors.

Break Large Orders

The programs have to figure out how to break large orders into smaller ones since HFT floods public exchanges with trading volume. You can execute smaller trades across multiple exchanges rather than trading on one exchange.

As a result, you can minimize front running, and the trader can avoid showing the location of these trades.

Dark pools came to be to help meet the liquidity needs of such smaller exchanges. The private financial exchanges provide traders with a method of completing very large orders that could not be completed on traditional public exchanges.

Due to their ability to list certain securities on exchanges, dark pools increase the efficiency of the market.

Dark pools: What they are and how they work

Five factors contribute to the emergence of a dark pool:

  • Reduction of transaction costs
  • A lower level of market volatility
  • Increased trader autonomy
  • Increasing trading efficiency
  • Avoiding mistakes in trading 

In addition to their particular trading methods, dark pools have been also popular due to their specializations. Nearly every dark pool functions as automated limit order books.

While some platforms operate continuously during the day, the rest consist of block trading-cross stages. Others process requests in the middle of the exchange, while others instantly allow or deny incoming orders. Other features include lower fees.

The Impact of Dark Pools on Individual Investors

Although dark pool trading has grown, its impact on unrestricted stock exchanges remains unclear since most retail and individual trades happen there.

Market condition, price increase, and market uprightness are some of the concerns regulators have with their growing popularity. Regulation ATS was amended by SEC Rule 304 in 2018 to need filing Form ATS-N.

Things You Should Know About Dark Pools

Dark pools can be so difficult to understand, so these ten things about dark pools should be essential in helping you understand how they affect the markets and, more importantly, how they can affect you and your equity trades.

  • They aren’t transparent; they’re dark

Dark pools, as the name implies, don’t have much visibility, so visibility is key to dark pool trading. A traditional stock exchange places an order with a price limit on its trading book when you send it to the market. It is publicly visible. Shares and prices are the only information you can see.

  • They are for everyone

Dark pool trading was originally set up so that only big, institutional investors could trade stocks with other big, institutional investors without affecting market prices. 

  • They are becoming more common

Banks and brokers quickly turned what began as a way for big institutions to get their trades running with as little market impact as possible into a great sales tool. 

  • They require stock markets

You need a market that is in a traditional form for dark pool trading. You can determine stock prices through them. A dark pool cannot see the price or the number of shares during trading. So, it needs to get its price from somewhere, which is why dark pools look to the displayed markets for a price benchmark.

They have Improved because of HFT

Originally, a dark pool came to be for institutions with large budgets. Nonetheless, dark pools grew rapidly, partly as a result of the rise of high-frequency trading (HFT) in the traditional displayed stock markets.

As high-frequency traders tried to sniff out large orders in the displayed markets, institutions felt even more threatened by the predatory trading of high-frequency traders.

Banks and Brokers Prefer Them

Brokers and banks are more than happy to execute trades in their dark pools to improve their bottom lines. With the size of average executed deals on dark pools decreasing, more and more small orders are being routed through dark pools before being sent to the displayed markets.

Brokers of dark pool trading may try to match your order. It’s okay to do this if it results in price improvements and an overall decrease in trading costs.

Do they Permit Front Running

When another trader knows that you’re about to buy (or sell) a stock, he or she buys (or sells) that stock, before you can and then immediately, sells it to you at a higher price.

Dark pool trading operators facing fines and lawsuits for such actions include some who have been fined.

The lack of transparency of dark pools makes it very tempting to use them for front-run orders. Take care when trading on dark pools.

There are Different Types 

Dark pools can take many forms. The lack of transparency is the only common factor, but they are all different from one another because they all have specific rules regarding who can participate in their pools and under what conditions.

Trading can happen within several dark pools which limit trade sizes and allow only large orders (blocks). Other dark pools will be open to high-frequency traders. Some dark pools even separate themselves by matching trades differently.

You can Regulate Them

According to some market pundits, a dark pool is not a complete version of the Wild West. National financial authorities in the respective countries monitor and police the activities and business practices of dark pools.

As dark pools grow, legislators and regulators want to know how dark pools happen. Due to this, dark pools face more and updated legislation to control how they operate.


The public doesn’t see institutional investors’ orders on dark pools, which are private electronic markets that trade stocks, bonds, and currencies.

It doesn’t directly affect individual investors, but regulators are concerned about the consequences for price discovery and market quality.

Dark pool exchanges offer different order execution models and sophisticated trading strategies. There is less transparency with dark pools than with traditional exchanges, but the costs are lower.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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