What is Dark Pools?

In finance, a dark pool (or  black pool) is a private forum (alternative trading system or ATS) for trading securities, derivatives, and other financial instruments.Liquidity on these markets is called dark pool liquidity. The bulk of dark pool trades represent large trades by financial institutions that are offered away from public exchanges like the New York Stock Exchange and the NASDAQ, so that such trades remain confidential and outside the purview of the general investing public. The fragmentation of electronic trading platforms has allowed dark pools to be created, and they are normally accessed through crossing networks or directly among market participants via private contractual arrangements. Generally dark pools are not available to the public, but in some cases they may be accessed indirectly by retail investors and traders via retail brokers.

What are the advantages of using a dark pool

• Decreased impact on market sentiment – Traders wishing to trade large size can conceal their intentions from the wider investing public. 
• Price improvement – The matching of trades is often done based on the average of the best available bid and ask price. In such cases, both the buyer and the seller get a more favorable trade than they could on the open market (the buyer gets to buy lower, and the seller gets to sell higher). 
• No slippage – Since most of dark pool trading is done in block trades at predetermined prices, traders can be sure that they will be able to execute their entire trade at the intended price.

What are the controversies around dark pools

• Conflict of interest – Since the order book is not visible, there is no guarantee that a trade was executed at the best possible price. If the institution facilitating the trade has a conflict of interest, it has the ability to obscure real market prices.
• Detrimental effect on market prices – If the majority of trading happens in dark pools, the prices on public exchanges may not reflect the actual market. A large part of investing and trading relies on the free flow of information, and dark pools hinder this availability.
• Vulnerability to high-frequency traders (HFTs) – Dark pools can be an ideal playing field for predatory practices by high-frequency traders. If they have privileged access to order book data, they can front-run large orders and take advantage of unsuspecting traders.
  Dark pools also enable another method called pinging, which includes sending a large number of small orders to map out a large hidden order. It is used to gauge areas of liquidity in the order book and gives high-frequency traders an advantage that can be considered unhealthy for the market.
• Smaller average trade size – Since their emergence in the 1980s, the average trade size of dark pools has significantly decreased. This signals that not only financial institutions who trade large size are using dark pools anymore. This makes their existence much less compelling and possibly even detrimental to the broader market. It may lead to a healthier market if smaller orders are executed in exchanges with a publicly visible order book. 

List of dark pools

Independent dark pools

• Chi-X Global
• Instinet
• Liquidnet
• NYFIX Millennium
• Posit/MatchNow from Investment Technology Group (ITG)
• State Street's BlockCross
• RiverCross Securities
• SmartPool
• TORA Crosspoint
• ETF One [32]
• Codestreet Dealer Pool for Corporate Bonds[33]

Broker-dealer-owned dark pools[edit]

• 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
• Citi - Citi Match, Citi Cross
• Credit Agricole Cheuvreux - BLINK
• Credit Suisse - CrossFinder
• 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

Consortium-owned dark pools

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

Exchange-owned dark pools

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

Dark pool aggregators

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

Conclusion

Due to the complete lack of transparency, dark pools have been a topic of controversy since their existence. Concealing a majority of the trading volume is not a desirable property when it comes to any market.

With the recent developments in cryptographic verification methods, the process of using dark pools could become safer. Open-source protocols can be built in a way that verifiably maintains the same rules for every participant, which reduces the risk of using a dark pool.

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