Dark Pools are created by brokers, banks or independent firms to allow their clients to trade directly with each other anonymously without having to route the orders onto one of the exchanges. They have taken over one of the major roles of inter broker-dealers who allow institutions to trade large blocks of shares anonymously. One of the reasons they have been created is due to concerns with large market orders impacting the market.
In a Dark Pool, no information is provided about the order book which shows all the buys and sellers in the market. Clients will simply post their Bids and Asks to the dark pool and if someone wants to take the other side of the trade, the order will be filled. The opaqueness of this market allows traders to trade large quantities without the other market participants to knowing the order and therefore can give a better price. All orders placed are ‘off exchange’ and are then reported after the fact.
Recently dark pools have been given a bad name from books such as flash boys and other articles. The charge put against the dark pools is that they provided a better connection and greater information about what the dark pools contained allowing them to discern the underlying data against the general purpose of the pool. There has even been an accusation of dark pools paying certain retail brokerages to execute in their pool whilst allowing HFT traders to pick off these client orders leading to retail clients getting poor order fills. They have seen increased scrutiny after the critical portrayal in Michael Lewis' book "Flash Boys," which makes the case that dark pools have allowed high-frequency traders to rig the market against customers.
Back in 2014, the New York attorney general announced the lawsuit against Barclays Bank for giving an unfair advantage to some of its High-Frequency Traders while providing misleading information to their other clients. This has been followed by investigations into Credit Suisse.
Regulators may have won about $150 million from Credit Suisse and Barclays for behavior in their dark pools, but the closed trading platforms are still wildly popular. According to reports released by dark pool operators in January, dark pool trading in Europe was up 45 percent by value and 25 percent by volume in December compared to the previous year.
Overall dark pools will not be something the average trader will have to worry about but as always very interesting to know. It can help to give you a small glimpse into the new trading world of high-speed trading coupled with and secretive deals on Wall Street.