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How Dark Pools Work

by Busines Newswire
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Financial markets use complicated systems, software, special tools, and algorithms for trading. Big companies and banks use private trading markets called dark pools to make money and hide their actions from others. These markets cater to a select demographic, enabling them to earn substantial profits.

Explaining Dark Pools

Dark pools are private marketplaces where companies and investors privately trade and sell securities, including stocks, currencies, and commodities. Critics argue that these markets are ambiguous and not accessible to secondary market participants. However, they exist to avoid market instability caused by large corporations selling stocks in the open market.

The SEC in the US regulates dark pools, ensuring participants do not manipulate the market or engage in predatory activities. Only large hedge fund companies, finance enterprises, and banks can access these pools. 

A block trade in a dark pool is defined as a transfer of tradable assets worth a minimum of $200,000 or trading more than 10,000 shares in the stock market. These markets have grown significantly in the US, accounting for 40% of total stock market trading.

Pros And Cons

Dark pools, despite their ambiguity, offer several benefits to traders. They avoid the impact of public marketplaces, lower trading costs, higher liquidity, and privacy by preventing the need for intermediaries, brokers, and channels. Large corporations and institutional investors can find matching orders in private markets as they trade with millions of assets and dollars.

However, dark pools also have disadvantages, such as unfair competition due to lower processing rates and the possibility of manipulative trading strategies. 

HTF technologies are used in dark pools, allowing traders to estimate order flow and volume and understand market prices and dynamics. Despite these drawbacks, dark pools offer a more accessible and transparent trading environment for companies seeking to keep their investments undisclosed.

Conclusion

Dark pool trading implicates purchasing and selling stocks and securities in private marketplaces accessible only to select investors and corporations. This bulk-trading activity, involving 250,000 shares, benefits the public market by preventing severe market changes and ensuring corporate privacy from competitors.