What is a Dark Pool?

A dark pool is also known as a black pool. It is a forum for the exchange and trade of securities and financial instruments in which investors trade without the trade being exposed until after execution. Securities, derivatives and financial instruments traded in this forum cannot be publicly accessed by other investors. Investors that engage in this form of trading trade without publicly revealing their intentions until after the trade is executed.

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How Does a Dark Pool Work?

Investors and brokers can trade a large share or engage in block trading using the dark pool. This alternative trading system started in the 1980s, at this time, the SEC approved block trade in this system. Dark pools charge minimal fees for transaction when compared to the normal stock exchanges. Dark pools have however continued to increase, especially with the emergence of electronic trading that was developed to minimise transaction cost. The ruling of the Securities and Exchange Commission (SEC) in 2007 that opened doors to competitive trading also contributed to an increase in the number of dark pools. Institutional investors and brokers who want to transact a large number of shares often participate in dark pools. Investors find buyers and sellers without exposing their true intention using the dark pools. This method help prevent weighty price devaluation which could have happened if the true intentions of traders were made public. Basically, dark pools provide private trading for investors, especially investors that want to engage in block trade. There are many types of dark pools in the United States such as Goldman Sachs' Sigma X dark pool andMorgan Stanley's MS Pool. However, one downside of dark pools is that they lack transparency and are seen to be unfair practices by a set of investors. Although, dark pools are regulated by the SEC, their increase is regarded as unsafe for the stock market.