What is a Dark Pool?

A dark pool is a private venue where institutions trade big blocks of shares without listing those orders publicly. It keeps a list only its matching system reads; the members trading there cannot see it. An order gives a stock and a quantity but no price, and rests unseen until an opposite order arrives. The pool then fills both at a price copied from the exchange. Funds accept that because an order that large, shown openly, moves the price against them.

A dark pool is a private venue where institutions trade big blocks of shares without listing those orders publicly. On an exchange, every order waits in the order book, a public list anyone can read. A dark pool runs a list too, but only its matching system reads it; not even members trading there see what others entered. A fund selling two million shares sends the order in, and it rests unseen until a member wants to buy. If none does, the order expires unfilled. The fund takes that risk because two million shares posted openly is a signal every trader can read. Buyers wait for a better price, other holders sell ahead of the fund, and the price falls with most of the order unsold. What the fund sends in names a stock and a quantity, never a price. When two opposite orders meet, the pool fills them at the midpoint of the best public buying and selling prices, so $40.00 and $40.02 on the exchange make $40.01 in the pool. Here is the complaint about all this. Every block matched in a pool is a block that never traded on the exchange, and the exchange is where a price gets worked out, by orders that do name numbers and compete. The more volume goes dark, the fewer public trades are left setting the number the pools copy.

A company wants to replace its finance director, who is still in the job and has not been told. An advert would tell him, and every rival and customer who reads it. So the company briefs a search firm. The firm holds candidates the company never sees and cannot approach, and introduces one only when somebody fits the brief. What the role pays elsewhere shapes the offer. A dark pool does this for a block of shares, holding the order unadvertised until a buyer appears. The comparison stops at the middleman. A search firm is people who read every brief and know their own books, and the salary is argued over before anyone signs. A pool never argues, and takes its number from the public market.