All you need to know about Dark Pool Trades

Dark pool trading or printing is an OTC blockchain transaction (over the counter) through a private exchange that is only available to institutional investors. These private exchanges are known as “dark pools” due to the lack of complete transparency. According to the CFA, the popularity of dark pools continues to grow, with an estimated 50% of total stock trading in dark pools in 2022 compared to 40% in 2017.

How are non-transparent transactions done?

A non-transparent trading system in various financial markets, such as stock exchanges, allows institutions to buy and sell financial instruments such as securities and their derivatives or other similar instruments without disclosing trading details, and is an alternative to ordinary stock trading. Stock exchanges and other financial markets.

This trading system is called Dark Pool, which means “dark pool”. In a non-transparent trading network, transaction information is not recorded in the market registry and these exchanges are not exposed to the public.

In one sentence, we can say that the trading network is not transparent and the history of transactions is not made public.

The liquidity in circulation in these exchanges is called “ dark pool liquidity ” and transactions in these networks are generally done in blocks. Block trades are high volume trades and predetermined amounts.

The history of dark pool trading

Dark transactions or black pools were first used in the 1980s. At this time, some large corporations decided to use a non-transparent trading network to exchange large volumes of securities. They wanted to protect the entire market from the effects of their large exchanges; Do not have a significant impact on the process and do not harm the market and other small investors.

Initially, this was the purpose of the system in general; Positive results were obtained from black pools, and the network became very popular in the US financial and stock markets. Large investors without causing severe fluctuations or losses for other investors and traders; they did their big business in silence and without breaking the news.

Over time, as the demand for transactions in this system increased, black pools were sometimes used in an undesirable direction, and their lack of transparency created the basis for extra-legal exchanges. These problems caused the volume of these transactions to decrease to some extent, but the dark trading network was never completely eliminated and is still used in various markets.

What are the benefits of Dark Pool Trades?

The first and most important advantage of black pools is the lack of psychological and emotional impact on the market and its fluctuations. High volume transactions always have a very significant impact on different economic markets and cause fundamental changes in market trends. But if there is no news of such big deals; it will not affect the constant trend of the market and uncontrollable fluctuations will not occur. Secondly, as these transactions are conducted in an almost confidential manner, there is no mention of the presence of intermediaries and their creation of unrealistic prices in non-transparent transactions. The prices in these trades are reasonable and real, and the best rate for the transaction is selected from the average of the highest and lowest market prices.

Finally, the non-transparent transaction rate, since these transactions are generally done in blocks, is determined precisely and definitively before the start of the transaction process. Therefore, both parties to the transaction are sure that the price will not change during the transaction, there will be no slippage, and it is not possible for the transaction to be canceled due to a sudden price change.

What are the down sides of Dark Pool Trades?

The followings are the potential drawbacks of Dark Pool Trading:

Profit mismatch

Since exchanges are not displayed publicly, there is no guarantee that an exchange will be made at the best possible price. If an institution that conducts exchanges has a profit mismatch, it has the ability to obscure the true market price for those involved in the exchange.

Harmful effect on market prices

If a large part of the exchanges take place in a non-transparent trading network, the prices on public stock exchanges may not reflect that real price. A large part of exchanges and investments depend on the public information that is always up to date. When a non-transparent trading network keeps this information secret, prices will also be non-transparent.

Vulnerability to High Frequency Trading

Dark pool trading networks are the ideal environment for those high-frequency predators! If they are among the special people who have full access to the information exchanged and can hide behind non-transparent transactions, then they can make big, much brighter deals that are completely hidden from public view.

The dark trading network also provides another method called Pinging, in which it sends a large number of small orders so that a large order can be hidden. This feature provides an excellent position for traders, which is extremely detrimental to the market.

Smaller average exchanges

Since 1980, when the dark trading network began, the average trading volume has been steadily declining. This shows that not only do financial institutions with large volumes no longer use the dark trading network, but it also makes its use and existence in the financial market unconvincing, even for those purposes that could be detrimental to the market.

Dark and decentralized trading network in crypto currency market

Like the dark trading network in stock markets, this network exists for the digital currency market on some platforms.

Compared to a conventional dark trading network, the decentralized version has a better digital security verification method, which is an advantage. Decentralized network protocols create a fair market price space for all subscribers, without even one person being able to influence and manipulate the price.

In exchanges involving multiple blockchain networks, the Atomic Swaps technique can be used to exchange transactions without the presence of a single relationship. The decentralized non-transparent trading network also uses other digital currency technologies such as Zero Knowledge Proofs to verify the accuracy and transparency of transactions in this non-transparent network.

A non-transparent trading network can also be used in non-liquid markets, where it allows traders to trade large volumes without price slippage. While a large order can have a significant impact on the non-liquidity market, the same exchange can take place in a decentralized dark trading network but without change or slippage.

Due to the lack of organizational exchangers in the digital currency space, the dark trading network has had little impact on digital currency markets, but that may change in the future.

Why do institutional investors use dark pool trades ?

Institutional investors trade in dark pools for two main reasons:

  • Find buyers and sellers for large orders without disclosing general purpose
  • Get better pricing for transactions

Dark pools allow institutional investors to quietly find buyers and sellers for large orders without causing major market fluctuations (usually against them). How is this possible? Dark pools are not required to make the order book available to the public. Instead, transactions through dark pools are published in the consolidated bar after a delay.

For example, suppose an investment bank is trying to sell 400,000 shares on a public stock exchange such as the New York Stock Exchange. As soon as institutional investors or high-frequency traders notice that a large block of sales has hit the order office, the markets react, and possibly until the investment bank can find enough buyers to fill the entire order. The value of security decreases. . However, if the transaction is disclosed only after it is done, this news will have much less impact on the market.

Another reason to fill large stock orders in dark pools is to get a better price. Transactions in dark pools can cost less in two ways:

  • Dark pools usually cost less to exchange
  • Lack of price transparency may lead to the filling of trades closer to the midpoint of the bid spread

A common criticism of dark pools is that insufficient trading through dark pools can lead to stock prices on public exchanges not reflecting the true market value. While the above scenario may work well for an investment bank that sells stock, consider a retail investor who has just bought shares in a company whose investment bank recently acquired 400,000 shares in a pool. When the sale of those 400,000 shares goes public, the stock price may fall, and the retailer who just bought the stock has paid a large sum.

In conclusion

Due to the lack of complete transparency, the dark pool trades’ network has been one of the most controversial issues in the world of economics. Concealing large-volume exchanges may not be a good idea for many existing markets.

However, in the case of digital currencies and their validation methods, the process of using the Dark Pool has become more secure and can be counted on. Using open source protocols, a way can be created for authentication to validate the use of this type of exchange and reduce any risk in it.




Atieh Gostar Computer Software Company (i-dev Software Group) Ltd and registration number 550646 were registered with the Tehran Registrar of Companies …

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Atieh Gostar Computer Software Company (i-dev Software Group) Ltd and registration number 550646 were registered with the Tehran Registrar of Companies …

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