Dark Trading Pools

In the April 2013 issue of ai-CIO, there is an article about the growth of dark trading pools.  These are private exchanges where investors trade anonymously.  Their nicknames include non-displayed markets, private markets, off-exchange trading or upstairs trading.  In 2008, they made up 6.5% of the total trading volume in US Equities.  In 2012, they have grown to take up more than 13%.

The main advantage of the dark pools is privacy.  An institutional investor getting into or out of a large position would not move the stock price much.  On the exchanges, a large order would be noticed and the price would move against the investor.  To hide their order, it would have to be split into many smaller orders by a sell-side salestrader.  Dark pools are not foolproof.  The stocks are usually limited to those with the highest trading volumes.  The operator of the dark pool could use the information to trade ahead of the investor or sell it to another trader.

Since 2007, investment banks have created dark pools such as Credit Suisse's Crossfinder and Goldman Sachs' Sigma X.  To generate additional revenue, they have given access to algorithmic traders in the quest to find discrepancies in security prices among exchanges.  If dark pool trading volume in more numerous trading venues grows, then the prices on public exchanges may no longer be accurate.  More pools means that investors would have search harder to find the other side of the trade.  It seems that the solution for one issue has created others.