If you just started trading, you might have heard something that sounds a bit too similar to Marvel’s Deadpool character between a video and a trading forum. Were you wondering what a dark pool is? What’s its purpose? Is it even legal? All the answers you’re looking for are straight ahead.
What’s a Dark Pool in Trading?
A dark pool is similar to your typical exchange broker, but the key difference here is that the trades being transacted in a dark pool are not publicly shown to retail traders. In general, dark pool transactions are huge trades being conducted outside of the best trading platforms, between major investors, banks, and organizations like Hedge Funds. The main goal of putting a dark pool in place was for these trades to not suddenly affect the stock market while moving huge blocks of shares at once.
Some people say that dark pools are a good thing for that reason, while others are against these practices. Indeed, this hidden market gives an unfair advantage for many rich traders and lacks transparency.
Is a Dark Pool Legal?
Yes, trading in dark pools is totally legal, but that doesn’t mean that all dark pool trades are clean. As a matter of fact, it is not unheard of to have private investors and institutions getting dirty with the help of dark pool exchange software. Just recently, a lot of people have been talking about AMC and the naked shorts, as many believe that there are dark pool trades being conducted in order to keep AMC’s stock price low.
What are the advantages and disadvantages of making trades in a Dark Pool?
Of course, a dark pool is a great way for investors to get certain rates at a discount while keeping their transactions entirely private from the public eye. However, that’s not the only advantage a dark pool is good for:
- As mentioned above, having a dark pool limits the impact these trades could have on the stock market when a whale buys a big block of shares for example.
- Dark pools don’t have exchange fees, so they are a lot cheaper than if you trade on a public exchange. Also, investors will usually have better rates for both selling and buying stocks, securities, bonds, etc.
Now, on the negative side of things:
- Lack of transparency, as in, you won’t know what happened.
- Conflict of interest, as the dark pool owners can decide to bet against dark pool clients, for example.
- Predatory practices often executed in high-frequency trades
So yes, as you can see, dark pools are like little trading world