Quick definition A dark pool is a private trading platform that matches buyers and sellers without revealing their identities or order sizes. Trades occur at the midpoint between the best bid and ask on lit venues. What it is Dark pools are electronic venues operated by investment banks and brokers. They match orders internally without publishing them. If a buyer and seller both want to trade, the dark pool matches them and executes the trade. Trades in dark pools do not appear on public order books until after execution. This anonymity is the key feature; traders can execute large positions without revealing their intent to the market. Why it matters Dark pools allow institutional investors to execute large orders without moving the market. A pension fund wanting to buy 1 million shares can access a dark pool and find a seller willing to sell without the market seeing the demand. Dark pools reduce market impact for large trades. But they also reduce transparency and price discovery. If a large informed trade occurs in a dark pool, the broader market does not see it and prices may not adjust as efficiently. Lit venue versus dark pool Lit venues publish all quotes and order information. Everyone can see the best bid, best ask, and the full order book. Dark pools do not publish this information; trades match behind the scenes. Most trading occurs on lit venues. Dark pools handle a growing share but remain a minority of volume. Practical example You want to buy 500,000 shares without moving the market. You access a dark pool and post an order to buy 500,000 at the midpoint (e.g., 100.005, the midpoint between 100.00 bid and 100.01 ask). A seller who also accessed the dark pool finds your order and sells 500,000 shares at 100.005. The trade executes without moving the market price. The execution is reported after the fact, but by then the price has already moved on to other trades. Criticism Dark pools reduce transparency and may disadvantage uninformed traders. They also create concerns about market quality and fairness. Some regulators and market participants have called for limiting dark trading. See also - Automated Trading System (ATS) - Venue - Block Trade - Market Fragmentation
