February 2015

‘Dark pools’ have been in the news a lot over the last year or two but how many of us really understand what they are? This month we attempt to clarify any confusion and answer questions you might have about dark pools.

Also known as ‘dark pools of liquidity’, dark pools are a name given to private exchanges unaccessible by the public. They began in the 1980s for exactly this reason – to give institutional investors a place to trade away from the stock market.

Dark pools get their names because of their lack of transparency. You don’t know who else is trading with you in a dark pool but this can give you a price advantage.

Around 2005 dark pools accounted for 3-5% of market activity in the US but as regulations changed broker-dealers launched some of their own dark pools. Dark pool trading activity is increasing. In 2014 it accounted for around 15% of volume in the US, with all non-exchange trading having surged to 40%.

There are three types of dark pools: independent, broker-dealer and exchange offered. Prominent independent dark pool providers include Instinet (Chi-x), LiquidNet and ITG. All the big IBs offer dark pool trading to their clients including Goldman Sachs (SIGMA X), Morgan Stanley (NightVision), JP Morgan (JPMX) and Credit Suisse (CrossFinder).