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Dark Pool

Dark pools are private networks for trading securities and private exchanges, which are generally developed by the institutional investors who wish to carry out block trades. As the name suggests, these orders are placed very secretly so that the order details of the trader are not made public. This enables the trader to reduce the impact cost of the trades with a high volume. Generally, high volume orders affect the market structure and the trader may find it difficult to get the best price. Dark pools are criticized on the grounds that they lack transparency as traders cannot see the trades being executed or the order flow.

 

Suppose an investment bank ABC wants to sell 1 million shares of a company, and if the trade is done on the exchange, the bank will not be able to get the best price because till the time it will find buyers for all of its shares, the price of the stock will change dramatically. Therefore, it will be favourable for the bank to conduct such a high volume trade through dark pools where new data will be released only after the whole block trade is executed.