What are dark pools and how do they work? The words "dark" and "pool" are used to identify large pools of stock that are traded "off exchanges," or in private, and are not shown to the general public. There is no transparency.
Years ago, all stock trades were made on listed exchanges. Expert stock traders would "read the tape" and follow the price changes in large blocks of stocks. Whether they were done on an uptick or down tick would give the trader a hint as to whether the trade was done on the buy or sell side. Every trade on the tape had an equal number of shares on the buy and on the sell side, so if the tape showed a trade of 10,000 shares of a stock, it meant that there was a buyer of 10,000 shares matched with a seller of 10,000 shares.
These days, on the New York Stock Exchange it is the "specialist" who must take the opposite side of a trade, while on the Nasdaq, trades are done electronically. Instead of a specialist, the computer matches the trades.
With the growth of mutual funds, hedge funds and macro investors, a whopping 10% to 15% of all shares traded are not done on listed exchanges. Instead, they are done in private, which is where the term "dark pool" comes from.
One practice of dark pool operators is to send out an indications of interest, or IOIs, to sniff out interest in a particular stock, much like public quotes. They can include the stock symbol, order size and price.
Regulators are concerned this practice is creating a two tiered market.
The SEC is seeking to bring some kind of transparency to dark pool trading. One proposal is to require "real time" post trade transparency so that the public can actually see the size and price of each trade. The SEC also wants to limit trades to 1% to 2% of market share from the present 5%.
The dark pool operators object to any kind of regulation. They maintain they provide a service by matching a large order with several smaller orders in order to execute it efficiently.
Those wanting regulation maintain that the smaller players are at a disadvantage by not knowing which way these large trades are going, i.e. to the buy or sell side. In normal electronic trading where bids and offers are listed, a trader can estimate the depth of both the buy and sell side. Trades done in private are kept secret from the public.
Do you favor regulation of "dark pools?"
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Reader Comments (Page 1 of 1)
10-31-2009 @ 7:51PM
StealthyOne said...
Dark pools are to the people in markets what Dick Cheney’s secret meetings with energy companies to coordinate the placement of oil infrastructure and production resources in Iraq prior to the invasion were to the people of the nation: an abuse of their system for special-interest gain.