dark pool

The origin of dark pools date back to 1979 when financial regulation changed in the United States that allowed securities listed on a given exchange to be actively traded off the exchange in which it was listed. Known as reg 19c3 the U.S. Securities and Exchange Commission passed the regulation which would start on April 26, 1979.{{Cite web |title=Rule 19c-3 |url=http://financial-dictionary.thefreedictionary.com/Rule+19c3 |access-date=June 5, 2019 |publisher=TheFreeDictionary}}{{Cite web |date=June 25, 2016 |title=What Are Dark Pools? - History of dark pools |url=https://www.fxcm.com/uk/insights/what-are-dark-pools/#footnote-3 |publisher=FXCM}}

The new regulation allowed the emergence of dark pools through the 1980s that allowed investors to trade large block orders while retaining privacy and avoiding market impact. In 1986, Instinet started the first dark pool trading venue known as "After Hours Cross". However it was not until the next year that ITG created the first intraday dark pool "POSIT", both allowed large trades to be executed anonymously which was attractive to sellers of large blocks of shares. For the next 20 years trades executed on dark pools represented a small fraction of the market, between 3–5% of all trades. This was sometimes referred to as "upstairs trading".{{Cite web |date=October 29, 2012 |title=Dark Pools Part I: What Is It And How Does It Work? |url=https://www.wallstreetoasis.com/blog/dark-pools-part-i-what-is-it-and-how-does-it-work |publisher=Wall Street Oasis}}

The next big development in dark pools came in 2007 when the SEC passed Regulation NMS (National Market System), which allowed investors to bypass public exchanges to gain price improvements. The effect of this was to attract a number of new players to the market and a large number of dark pools were created over the next 10 years. This was spurred on with the improvements of technology and increasing speed of execution as high-frequency trading took advantage of these dark pools.{{Cn|date=August 2021}}

By 2012, 40% of trading volume in equities took place in dark pools (of which there were more than 50 in the US) and internalizers. Most dark pools were run by large banks like Credit Suisse and Goldman Sachs.{{cite book |title = Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System |last = Patterson |first = Scott |year = 2012 |pages = 44–45 |publisher = Crown Publishing |isbn = 978-0307887177}}

In January 2025, according to Bloomberg data, a very slight majority of all trading in all U.S. stocks was occurring on dark pools, expected to make up 51.8% of trade volume that month—the third month in a row with over 50% of trade volume occurring in dark pools.{{Cite web |last=Doherty |first=Katherine |title=Wall Street enters darker age with most stock trading now hidden |url=https://www.detroitnews.com/story/business/2025/01/24/wall-street-enters-darker-age-with-most-stock-trading-now-hidden/77926767007/ |access-date=2025-02-07 |website=The Detroit News |language=en-US}}

Truly dark liquidity can be collected off-market in dark pools using FIX and FAST protocol based APIs. Dark pools are generally very similar to standard markets with similar order types, pricing rules and prioritization rules. However, the liquidity is deliberately not advertised—there is no market depth feed. Such markets have no need of an iceberg-order type. In addition, they prefer not to print the trades to any public data feed, or if legally required to do so, will do so with as large a delay as legally possible—all to reduce the market impact of any trade. Dark pools are often formed from brokers' order books and other off-market liquidity. When comparing pools, careful checks should be made as to how liquidity numbers were calculated—some venues count both sides of the trade, or even count liquidity that was posted but not filled.{{Cn|date=August 2021}}

Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges' public limit order books but without showing their actions to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed.http://fixglobal.com/home/control-and-flexibility-how-trading-can-add-value-to-the-investment-process/ {{Webarchive|url=https://web.archive.org/web/20200801171905/https://www.fixglobal.com/home/control-and-flexibility-how-trading-can-add-value-to-the-investment-process/ |date=2020-08-01 }} FIXGlobal. Control and Flexibility: How Trading Can Add Value to the Investment Process. Retrieved 12 October 2012.

Dark pools are recorded to the national consolidated tape. However, they are recorded as over-the-counter transactions. Therefore, detailed information about the volumes and types of transactions is left to the crossing network to report to clients only if they desire or are contractually obliged to do so.http://www.quantprinciple.com/invest/index.php/docs/realworld/darkpools/#tape Consolidated tape and DARK Pools

Dark pools allow funds to line up and move large blocks of equities without tipping their hands as to what they are up to. Modern electronic trading platforms and the lack of human interaction have reduced the time scale on market movements. This increased responsiveness of the price of an equity to market pressures has made it more difficult to move large blocks of stock without affecting the price."http://www.quantprinciple.com/invest/index.php/docs/realworld/darkpools/ Dark Pools: Some Reasons" Thus dark pools may protect traders from market participants who use HFT in a predatory manner.Congressional Research Service, "[http://fas.org/sgp/crs/misc/IN10140.pdf "Dark Pools" In Equity Trading: Significance and Recent Developments]", Accessed 8 Sept 2014.

Dark pools are run by private brokerages which operate under fewer regulatory and public disclosure requirements than public exchanges.{{Cite journal |last=Philips |first=Matthew |date=May 10, 2012 |title=Where Has All the Stock Trading Gone? |url=http://www.businessweek.com/articles/2012-05-10/where-has-all-the-stock-trading-gone |archive-url=https://web.archive.org/web/20120511040836/http://www.businessweek.com/articles/2012-05-10/where-has-all-the-stock-trading-gone |url-status=dead |archive-date=May 11, 2012 |journal=Bloomberg Businessweek}} Tabb Group estimates trading on the dark pools accounts for 32% of trades in 2012 vs 26% in 2008.

Some markets allow dark liquidity to be posted inside the existing limit order book alongside public liquidity, usually through the use of iceberg orders.{{Cite web |title=www.tsx.com |url=http://www.tsx.com/en/trading/products_services/iceberg_orders.html |url-status=dead |archive-url=https://web.archive.org/web/20070930055947/http://www.tsx.com/en/trading/products_services/iceberg_orders.html |archive-date=2007-09-30 |access-date=2007-08-21 |website=tsx.com}} Iceberg orders generally specify an additional "display quantity"—i.e., smaller than the overall order quantity. The order is queued along with other orders but only the display quantity is printed to the market depth. When the order reaches the front of its price queue, only the display quantity is filled before the order is automatically put at the back of the queue and must wait for its next chance to get a fill. Such orders will, therefore, get filled less quickly than the fully public equivalent, and they often carry an explicit cost penalty in the form of a larger execution cost charged by the market. Iceberg orders are not truly dark either, as the trade is usually visible after the fact in the market's public trade feed.{{Cn|date=August 2021}}

If an asset can be traded only publicly, the standard price discovery process has the best chance of making the public price approximately "correct" or "fair". However, very few assets are in this category, since most can be traded off market without revealing the trade publicly. As long as non-public trades are only a small fraction of trading volumes, the public price might still be considered fair. However, the greater the proportion of trading volume that happens non-publicly, the less confident we can be that the public price is "fair".{{Cn|date=August 2021}}

To lessen this adverse impact on price discovery, off-market venues can still report consolidated data on trades publicly. By this route, the trades occurring in dark pools can continue to contribute to price discovery, albeit with a little delay.FIXGlobal, "[http://fixglobal.com/home/the-impact-of-dark-pools-on-access-to-desirable-liquidity/ The Impact of Dark Pools on Access to Desirable Liquidity]" Retrieved 12 October 2012.

One potential problem with crossing networks is the so-called winner's curse. Fulfillment of an order implies that the seller actually had more liquidity behind their order than the buyer. If the seller was making many small orders across a long period of time, this would not be relevant. However, when large volumes are being traded, it can be assumed that the other side—being even larger—has the power to cause market impact and thus push the price against the buyer. Paradoxically, the fulfillment of a large order is actually an indicator that the buyer would have benefitted from not placing the order to begin with—he or she would have been better off waiting for the seller's market impact, and then purchasing at the new price.http://fixglobal.com/content/dark-pools-what-lies-beneath {{Webarchive|url=https://web.archive.org/web/20130730101935/http://www.fixglobal.com/content/dark-pools-what-lies-beneath |date=2013-07-30 }} FIXGlobal. Dark Pools: What Lies Beneath. Retrieved 12 October 2012.

Another type of adverse selection is caused on a very short-term basis by the economics of dark pools versus displayed markets. If a buy-side institution adds liquidity in the open market, a prop desk at a bank may want to take that liquidity because they have a short-term need. The prop desk would have to pay an Exchange/ECN access fee to take the liquidity in the displayed market. On the other hand, if the buy-side institution were floating their order in the prop desk's broker dark pool, then the economics make it very favorable to the prop desk—they pay little or no access fee to access their own dark pool, and the parent broker gets tape revenue for printing the trade on an exchange. For this reason, when entities transact in smaller sizes and do not have short-term alpha, they are recommended to not add liquidity to dark pools, but rather go to the open market where the short-term adverse selection is likely to be less severe.{{Cn|date=August 2021}}

The use of dark pools for trading has also attracted controversy and regulatory action in part due to their opaque nature and conflicts of interest by the operator of the dark pool and the participants, a subject that was the focus of Flash Boys, a non-fiction book published in 2014 by Michael Lewis about high-frequency trading (HFT) in financial markets.{{Cite news |title=The New York Times | date=31 March 2014 |url=https://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html?_r=1 |access-date=2014-04-11 | last1=Lewis | first1=Michael }}{{Cite news |last=Weil |first=Jonathan |date=April 1, 2014 |title=Weil on Finance: FBI Hops on Michael Lewis Bandwagon |work=Bloomberg News |url=http://www.bloombergview.com/articles/2014-04-01/weil-on-finance-fbi-hops-on-michael-lewis-bandwagon |access-date=April 1, 2014 |archive-date=April 25, 2015 |archive-url=https://web.archive.org/web/20150425220050/http://www.bloombergview.com/articles/2014-04-01/weil-on-finance-fbi-hops-on-michael-lewis-bandwagon |url-status=dead }}{{Cite news |last=Bradford |first=Harry |date=April 1, 2014 |title=FBI Investigating High-Frequency Traders: WSJ |work=Huffington Post |url=https://www.huffingtonpost.com/2014/03/31/fbi-high-speed-trading_n_5065622.html |access-date=April 1, 2014}}{{Cite web |date=March 31, 2014 |title=New York State AG Eric Schneiderman: Some high-frequency trading practices "may be illegal" |url=http://www.cbsnews.com/news/new-york-state-ag-eric-schneiderman-some-high-frequency-trading-practices-may-be-illegal/ |access-date=April 1, 2014 |website=CBS This Morning |publisher=CBS News}}

Pipeline Trading Systems LLC, a company offering its services as a dark pool, contracted an affiliate that transacted the trades.Scott Patterson and Jenny Strasburg, "[https://www.wsj.com/articles/SB10001424052970203889904577199114267593518 Traders Navigate a Murky New World]", Wall Street Journal, April 9, 2012. In the Pipeline case, the firm attempted to provide a trading system that would protect investors from the open, public electronic marketplace. In that system, investors' orders would be made public on the consolidated tape as soon as they were announced, which traders characterized as "playing poker with your cards face up". The service Pipeline offered was to find counterparties for various trades in a private manner. The firm was subsequently investigated and sued by the U.S. Securities and Exchange Commission (SEC) for misleading its clients.{{Cite web |last1=Gallu |first1=Joshua |last2=Mehta |first2=Nina |last3=Baker |first3=Nick |title=Pipeline Settles With U.S. SEC Over Dark Pool Claims |url=https://www.bloomberg.com/news/articles/2011-10-24/pipeline-agrees-to-pay-1-million-over-sec-dark-pool-claims |access-date=28 February 2015 |website=Bloomberg L.P.}} Following its 2011 settlement of the SEC's claims against it, the firm rebranded itself as Aritas Securities LLC in January 2012.{{Cite web |last=Armstrong |first=James |title=New Leadership, New Name, Pipeline Struggles to Start Over |url=http://www.tradersmagazine.com/news/pipeline-aritas-trading-109742-1.html?ET=tradersmagazine:e1225:47854a:&st=email |access-date=28 February 2015 |website=Traders Magazine}}{{Dead link|date=October 2022 |bot=InternetArchiveBot |fix-attempted=yes }}

In 2009 the U.S. Securities and Exchange Commission (SEC) announced that it was proposing measures to increase the transparency of dark pools, "so investors get a clearer view of stock prices and liquidity". These requirements would involve that information about investor interest in buying or selling stock be made available to the public, instead of to only the members of a dark pools.U.S. Securities and Exchange Commission, "[https://www.sec.gov/news/press/2009/2009-223.htm SEC Issues Proposals to Shed Greater Light on Dark Pools]", 21 October 2009, accessed 25 May 2012. FINRA announced in January 2013 that it will expand its monitoring of dark pools.{{Cn|date=August 2021}}

In June 2014 the U.S. state of New York filed a lawsuit against Barclays alleging the bank defrauded and deceived investors over its dark pool. A central allegation of the suit is that Barclays misrepresented the level of aggressive HFT activity in its dark pool to other clients. The state, in its complaint, said it was being assisted by former Barclays executives and it was seeking unspecified damages. The bank's shares dropped 5% on news of the lawsuit, prompting an announcement to the London Stock Exchange by the bank saying it was taking the allegations seriously, and was cooperating with the New York attorney general.{{Cite news |title=Dark pool fraud lawsuit filed against Barclays in US |publisher=New York Telegraph |url=http://www.newyorktelegraph.com/index.php/sid/223293195/scat/3a8a80d6f705f8cc/ht/Dark-pool-fraud-lawsuit-filed-against-Barclays-in-US |url-status=dead |access-date=27 June 2014 |archive-url=https://archive.today/20140628010744/http://www.newyorktelegraph.com/index.php/sid/223293195/scat/3a8a80d6f705f8cc/ht/Dark-pool-fraud-lawsuit-filed-against-Barclays-in-US |archive-date=28 June 2014}} In July 2014 Barclays filed a motion for the suit to be dismissed, saying there had been no fraud, no victims and no harm to anyone. The New York Attorney General's office said it was confident the motion would not succeed.{{Cite news |title=Barclays seeks dismissal of New York dark pool suit |publisher=The London News.Net |url=http://www.thelondonnews.net/index.php/sid/224095831/scat/3a8a80d6f705f8cc/ht/Barclays-seeks-dismissal-of-New-York-dark-pool-suit |url-status=dead |access-date=25 July 2014 |archive-url=https://archive.today/20140806065744/http://www.thelondonnews.net/index.php/sid/224095831/scat/3a8a80d6f705f8cc/ht/Barclays-seeks-dismissal-of-New-York-dark-pool-suit |archive-date=6 August 2014}} In January 2016, Barclays agreed to pay a fine of $35 million to SEC and $70 million to NYAG for its dark pool wrongdoings.{{Cite news |date=31 January 2016 |title=Barclays, Credit Suisse Charged With Dark Pool Violations - Firms Collectively Paying More Than $150 Million to Settle Cases |publisher=SEC |url=https://www.sec.gov/news/pressrelease/2016-16.html |access-date=15 November 2017}}

In January 2015 the U.S. regulators imposed a fine on UBS Group AG’s dark pool for failing to follow rules designed to ensure stock trades are executed fairly.{{Cite web |last=Mamudi |first=Sam |title=UBS Hit With Record Dark Pool Fine for Breaking U.S. Rules |url=https://www.bloomberg.com/news/articles/2015-01-15/sec-fines-ubs-dark-pool-more-than-14-million-for-breaking-rules |access-date=2016-05-09 |website=Bloomberg.com}}{{Cite web |date=15 January 2015 |title=SEC Other Release No.: 34-74060, UBS Securities LLC |url=https://www.sec.gov/litigation/admin/2015/33-9697.pdf |website=Administrative Proceedings Archive 2015 |publisher=SEC}} In ordering UBS to pay $14.4 million, including a $12 million fine that exceeds all prior penalties against an alternative trading system, the Securities and Exchange Commission flagged a series of violations from 2008 to 2012. It said UBS let customers submit orders at prices denominated in increments smaller than a penny, something SEC rules prohibit because it can be used to get a better place in line when buying or selling stock. The ability to trade in sub-penny increments also wasn’t widely disclosed to UBS customers, and was instead pitched secretly to market makers including high-frequency traders, according to the SEC.{{Cn|date=August 2021}}

In August 2015, ITG (and its affiliate AlterNet Securities) settled with SEC for $20.3 million due to operating a secret trading desk and misusing the confidential trading information of dark pool subscribers.{{Cite web |date=12 August 2015 |title=SEC Charges ITG With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information |url=https://www.sec.gov/news/pressrelease/2015-164.html |access-date=15 November 2017 |publisher=SEC}}

{{Unreferenced section|date=August 2023}}

Hypothetically, a retail "everyday" shareholder in any company could be disadvantaged if a dark pool trade is executed by a seller within the dark pool getting rid of a large number of that company's shares, which would thereby cause the price to drop.

Share trading performed on platforms available to the public usually come with functionality allowing any user to see how many "now" and "sell" orders are in the pipeline that day for any individual security on the platform (i.e. NASDAQ).

In turn, if dark pool trades were publicly viewable in the same way, a retail shareholder could prevent loss by selling at the same time, before the price went any lower (assuming that shareholder is confident the price won't go back up).

Because they are private and withheld from the public, in this way, they pose some risk for traders outside the dark pool.

{{More citations needed|section|date=July 2021}}

Three major types of dark pools exist:

1. Independent companies set up to offer a unique differentiated basis for trading
2. Broker-owned dark pools where clients of the broker interact, most commonly with other clients of the broker (possibly including its own proprietary traders) in conditions of anonymity
3. Some public exchanges set up their own dark pools to allow their clients the benefits of anonymity and non-display of orders while offering an exchange "infrastructure"

• Chi-X Global
• Instinet
• SygnumOTC
• Liquidnet
• NYFIX Millennium
• Posit/MatchNow from Investment Technology Group (ITG)
• State Street's BlockCross
• RiverCross Securities
• SmartPool
• TORA Crosspoint
• ETF One{{Cite web |title=ETFONE |url=http://www.etfone.com/ |url-status=dead |archive-url=https://web.archive.org/web/20130530221219/http://etfone.com/ |archive-date=2013-05-30 |access-date=2013-07-22}}
• Codestreet Dealer Pool for Corporate Bonds{{Cite web |title=Tradeweb Markets :: Tradeweb |url=http://www.codestreet.com/ |url-status=dead |archive-url=https://web.archive.org/web/20150127022149/http://www.codestreet.com/ |archive-date=2015-01-27 |access-date=2015-02-02 |website=www.codestreet.com}}

• JP Morgan – JPMX
• Barclays Capital – LX Liquidity Cross
• BNP Paribas – BNP Paribas Internal eXchange (BIX)
• BNY ConvergEx Group (an affiliate of Bank of New York Mellon)
• Cantor Fitzgerald – Aqua Securities
• Citadel Connect – Citadel
• Citi – Citi Match, Citi Cross
• Credit Agricole Cheuvreux – BLINK
• Deutsche Bank Global Markets – DBA (Europe), SuperX ATS (U.S.)
• Fidelity – Capital Markets
• GETCO – GETMatched
• Goldman Sachs – SIGMA X
• Knight Capital Group – Knight Link, Knight Match
• Merrill Lynch – Instinct-X
• Morgan Stanley – MSPOOL
• Nomura – Nomura NX
• UBS Investment Bank – UBS ATS, UBS MTF, UBS PIN
• Societe Generale – ALPHA Y
• Daiwa – DRECT
• Wells Fargo Securities LLC – WELX (has since closed)

• BIDS Trading – BIDS ATS
• LeveL ATS
• Luminex (Buyside Only)

• ASX Centre Point
• International Securities Exchange
• NYSE Euronext
• BATS Trading
• Turquoise
• XTX Markets

• Fidessa – Spotlight
• Bloomberg Tradebook
• Liquidnet – LN Dark
• Deutsche Bank – SuperX+
• Software AG – Apama
• ONEPIPE – Weeden & Co. & Pragma Financial
• Xasax Corporation
• Crossfire – Credit Agricole Cheuvreux
• Instinet – Nighthawk
• Bernstein – Shadow
• Wells Fargo – Komodo Dark

Dark pools were largely motivated by the trades of large blocks and participants who did not want to move the market and cause front running.{{Cite journal |last=Hatch |first=Robert |date=2009–2010 |title=Reforming the Murky Depths of Wall Street: Putting the Spotlight on the Security and Exchange Commission's Regulatory Proposal concerning Dark Pools of Liquidity |url=https://www.gwlr.org/wp-content/uploads/2012/08/78-5-Hatch.pdf |journal=George Washington Law Review |volume=78 |pages=1032 |archive-url=https://web.archive.org/web/20200329171428/https://www.gwlr.org/wp-content/uploads/2012/08/78-5-Hatch.pdf |archive-date=2020-03-29}} In the United States, however, these trades were stymied by Regulation NMS in 2004. However, under section 5{{Cite web |title=15 U.S. Code § 78e - Transactions on unregistered exchanges |url=https://www.law.cornell.edu/uscode/text/15/78e |access-date=2020-03-29 |website=LII / Legal Information Institute |language=en}} of the Securities Exchange Act of 1934 and Regulation ATS of 1998, off-exchange trading was allowed for up to five percent of the national volume of a stock.

The U.S. SEC adopted rules, as amendments to Regulation ATS, to require disclosures about dark pools in 2018.{{Cite web |title=SEC.gov {{!}} SEC Adopts Rules to Enhance Transparency and Oversight of Alternative Trading Systems |url=https://www.sec.gov/news/press-release/2018-136 |access-date=2020-03-29 |website=www.sec.gov}} Known as Rule 304 of Regulation ATS,{{Cite web |title=Form ATS-N Filings and Information |url=https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm |access-date=2020-03-29 |website=www.sec.gov}} it requires the filing of Form ATS-N which includes a variety of disclosures including conflicts of interest, methods, fees, and so on.{{Cite web |date=2018-07-19 |title=SEC to adopt transparency rules for dark pools |url=https://www.finextra.com/pressarticle/74776/sec-to-adopt-transparency-rules-for-dark-pools |access-date=2020-03-29 |website=Finextra Research |language=en}} A review of these forms revealed a number of differences, including "tiering", "pegging", and "immediate-or-cancel (IOC)" orders, as well as a special features such as a speed bump by IEX to prevent high-frequency trading.{{Cite web |last=Bacidore |first=Jeff |date=2019-11-26 |title=Are Dark Pools All the Same? Form ATS-N Says "No" |url=https://www.tradersmagazine.com/news/are-dark-pools-all-the-same-form-ats-n-says-no/ |access-date=2020-03-30 |website=Traders Magazine |language=en-US}}

FINRA reports data on ATS systems quarterly for free,{{Cite web |title=ATS Transparency Data Quarterly Statistics {{!}} FINRA.org |url=https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics |access-date=2020-03-29 |website=www.finra.org}} which it began doing in July 2015.{{Cite web |title=Downloadable ATS Data Available at no Charge on FINRA.org July 13, 2015 {{!}} FINRA.org |url=https://www.finra.org/filing-reporting/otc-transparency/technical-notices/technical-notices/downloadable-ats-data-available-no-charge-finraorg-july-13-2015 |access-date=2020-03-29 |website=www.finra.org}} When FINRA released this data, it showed that trades averaged 187 shares, which suggests that the pools were not used for large trades by institutional shareholders.{{Cite web |last=D'Antona |first=John Jr. |date=2020-01-03 |title=FLASH FRIDAY: Turning the Spotlight On Dark Pools |url=https://www.tradersmagazine.com/flashback/flash-friday-turning-the-spotlight-on-dark-pools/ |access-date=2020-03-29 |website=Traders Magazine |language=en-US}}

• Crossing network
• Lit pool
• Alternative trading system
• Electronic communication network
• All or none
• Payment for order flow

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Category:Financial markets

Category:Securities (finance)