Dark Pool Trading

Dark Pool Trading

9 min read

Have you heard of dark pool trading? The stock market is dynamic and vast. Each component works together in harmony to create a financial ecosystem in which investors and traders can participate. There are billions of dollars floating around in this marvelous creation. As a result, there are a lot of aspects in the financial markets that one has to understand in order to master the art of trading and investing. One such aspect is dark pool trading. 

Now, you may wonder what exactly dark pools are? In this article, we’ll discuss and introduce you to dark pools and explore everything there is to know about them! So let’s get started!

To understand dark pool trading, we need to know what it is. Dark pools, or black pools, are privately organized and managed financial exchanges for trading securities. These dark pools aren’t accessible to the general public. Therefore, are basically unknown to retail and general investors. In other words, dark pools allow big institutional investors to sell and purchase large amounts of securities with complete secrecy and no disclosure until their trades have been executed. This is also known as block trading. These dark pools allow large institutions to execute trades with gigantic quantities and offers them a discreet way to trade.

Why Were Dark Pools Created?

Why were dark pools created? Because big institutional investors needed privacy while trading large block orders. 

Large institutions needed privacy to trade large block orders. As a result dark pools were created. In fact, dark pools are also known as dark pools of liquidity.

When trading huge block orders, institutions wanted to avoid impacting the markets. Hence, dark pool trading was born. Investors trading a large number of securities on the regular exchanges would move markets.

Those huge trades would impact price greatly. As a result, we’d have huge volatility. They allowed institutions to trade large orders without having any impact on the prices. 

Now there are more than fifty dark pools registered with the U.S. Securities and Exchange Commission. Dark pool trading is different than being a market maker

Dark Pool Trading SPY

Here we see the recent dark pool trades placed on $SPY – the horizontal blue lines show what price the trades were placed at, and what date and time.

History and Creation of Dark Pools

The origin of dark pools dates back to 1979. They decided to change financial regulations in the US. As a result, securities listed on one exchange could trade elsewhere. They no longer had to trade only on the exchange to which they were listed.

This new regulation allowed the creation of dark pools that emerged throughout the 1980s. This allowed institutional investors the ability to trade large block orders and avoid impacting the markets.

This gave them privacy and a method to trade in large quantities without any exposure. As a result, dark pool trading was born. It’s good that volume isn’t affected.

Avoiding Market Impact

Since the inception of dark pools, institutional investors and funds have been able to move big block orders with ease. This results in avoiding impact to the markets and prices.

And with the modern convenience of electronic trading platforms, the creation of dark pools are easier and flexible. They’re mainly managed by private organizations.

These financial forms are an exchange for trading in enormous quantities of securities. However, they’re not accessible to the general public. 

Have you heard of Flowtrade, however? If you want to look into using dark pool trading to your advantage, check them out. Check out our Flowtrade review and learn how to get a free Bullish Bears membership through them.

Dark Pool Indicator

On the charts here we see the bright blue dark pool indicator which shows the hidden hand behind the stocks in each window.

The Purpose of Dark Pool Trading

  1. Dark pools are built to cater and provide additional liquidity and secrecy to big players trading huge blocks of securities.
  2. Dark pools allow big institutions placing large trades to avoid impacting the markets and prices.
  3. Any number of securities can be easily sold or bought away from the eye of the general public.
  4. Dark pool participants don’t need to disclose their trades until they’re executed and finished.
  5. Dark pools allow institutions to cover their strategies and plans.
  6. They’re able execute their trades without letting anyone know. 
  7. And it ensures the sale and purchase of any number of securities with ease.

Types of Dark Pools

One might think that there’s just a single type and category of dark pools. In reality, there are three different types of dark pools. 

As a result, we’re going to dig into each one and understand how dark pool trading works. Then you can make an informed decision about how a tool like Flowtrade would benefit your trading. 

Dark Pool Trading Example

Recent Dark Pool Trades hitting our scanner. Read more about this over at our FlowTrade Review.

Agency or Exchange Owned

These dark pools are set up by public exchanges and agencies. They allow their clients the benefits of anonymity and secrecy while executing their orders.

These dark pools act like agents. It’s a way for the institutions to access these dark pools easily. Then they’re able execute their trades and access high liquidity.

Broker Owned

Broker owned dark pools are created by brokers themselves for their clients. These dark pools allow the big players a unique and anonymous way for trading.

The prices are derived from the order inputs and flow. As a result, the clients of these brokers are allowed access to dark pools.

As a result, execution of their high volume trades is done in complete secrecy. These brokers may also cater to proprietary traders.

The Electronic Market

Electronic market dark pools are also like the broker-owned dark pools. Clients are offered access to execute large block orders with anonymity.

The prices here aren’t calculated in a general manner. However, there is price discovery. Electronic market dark pools are offered by independent organizations.

Is Dark Pool Trading Legal?

A secondary way for institutions to trade without anyone knowing? Is that even legal? Yes! Dark pool trading is legal. The good news for us retail traders is that dark pools allow the big trades to happen without affecting our trades. Imagine if one of those institutions came in bearish in a stock we were bullish in. Whew! We’d be up a creek without a paddle. Thankfully, Alternative Trading Systems are in place to keep that from happening. 

High-Frequency Trading and Dark Pools

Since the inception of algorithmic trading and modern technology, these programs allow traders to execute thousands of trades in a matter of seconds, providing an edge over others. And when dark pools are combined with HFT, the trades executed with huge volume of millions of shares are also completed in seconds giving the traders a huge advantage. And dark pools offer the liquidity required to large institutions and funds.

HFT combined with dark pools allows the big players to execute their large block orders of millions of shares within a few seconds, thus optimizing their execution prices and increasing profits.

AAPL Dark Pool Block

The shorter time frames can be used to place long or short trades based on what the dark pool indicator and dark block trades are doing. Here we see $AAPL on a 1 min chart.

What Are the Advantages?

Dark pools offer various advantages to its users. What are those advantages?

  • Complete Privacy While Executing Trades

Dark pools allow the execution of trades with complete privacy from the general public. Generally, markets and its participants tend to over react to news of big trades. Therefore, dark pools help avoid this problem. The offering of complete privacy avoids unnecessary price reactions.

  • The Benefit to Avoid Price and Market Movements

The price of the traded security remains stable because the trades aren’t known to retail traders. As a result, there’s no price overreaction or under reaction due to the executed order.

  • Availability of Liquidity and Increased Efficiency

Liquidity and volume is a major part of trading any security. Therefore, dark pools give the big institutions and funds access to huge liquidity to trade millions of shares with ease. As a result, this increases the overall market efficiency, providing an advantage.

What Are the Disadvantages?

While dark pools offer various advantages, it also has a few disadvantages and drawbacks. Let’s take a look at some of the disadvantages to dark pool trading.

  • Total Lack of Transparency

As dark pools offer complete secrecy and anonymity, the general public will have no idea of the moves that the big institutions are making. As a result, it’s an advantage to the big players but unfair to other investors and traders. The special advantage provided puts all other market participants in a vulnerable position. They have no idea of what’s being done in the markets by big players.

  • Wrong and Unfair Practices

There’s always an element of unfair practice being done by large institutions who combine HFT with dark pools. They can offload thousands of shares within seconds. In fact, other market participants cannot match making it a very big disadvantage.


Now we have knowledge of dark pool trading. And you’re aware of some of the secrets and unknown elements of the stock market. These dark pools are a huge part of the financial market.

In fact, it’s basically a playground for large institutions and other big players. General retail participants can only learn and understand how these dark pools function. Access to them isn’t possible. 

So with this knowledge, you have now enhanced and improved your awareness of the stock market. In fact, it’s always a benefit to be aware of all the components of our financial world. If you’re looking to feed your brain daily and learn stock trading, join us today.

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