3/31/2023 0 Comments Dark pool trading“You invite a few to start Texas Hold ‘Em by telling them that the deck doesn’t have any jacks or queens and that they won’t tell that info to other people joining the game.” Dark pools on the FX marketĪlthough dark pools are usually associated with the stock market, they are also used by participants of other markets such as the foreign exchange market. The author presented dark pools in a very unfavourable light, comparing them to casino owners who try to attract players. Trades are only reported with a delay on the consolidated tape.Īlthough dark pools came into existence in the 1980s, they recently hit the headlines again with Michael Lewis’ best-seller book “Flash Boys”. Dark pools would provide the best execution conditions for such an investor, as trading intentions are not disclosed before the order execution, and therefore no order books are available to the public. Even splitting the order up into smaller pieces would still have a sizeable market impact. If an investor wanted to sell shares that represent 10% of a particular company, doing so on a regular exchange would have a significant market impact, leaving the investor with an unfavourable price for their shares. Let’s consider the options that such an investor had before the advent of off-exchanges such as dark pools. However, dark pools can be of real benefit to large investors who want to execute their orders. In this way, although the dark pools’ lack of transparency is beneficial to their participants, it has recently also spurred some controversy over potential conflicts of interest and vulnerability to high-frequency traders, who use dark pools to front-run large orders and profit at the expense of real investors. The main purpose of dark pools is to facilitate and execute block trades for large investors at favourable prices, which would otherwise have a significant market impact if executed on regular exchanges. They were created by big Wall Street firms to allow for the anonymous execution of large trading orders (block trades) for their clients. The term “dark pool” refers to private exchanges that, unlike stock exchanges, are not accessible to the overall investing public. “The hidden passages and trapdoors that riddled the exchanges enabled a handful of players to exploit everyone else.” – Michael Lewis, Flash Boys What is a dark pool?
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