What Are Dark Pools? 10 Things to Know.

Dark pools have attracted attention from retail investors after a petition on Change.org advocated for the removal of AMC (NYSE:AMC) and GameStop (NYSE:GME) from them. The petition states that these two companies should be taken out of dark pools since retail investors own a large amount of AMC’s and GME’s shares outstanding. Furthermore, the petition claims that U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler has “very low regard” for the detrimental effects of these exchanges. At the time of writing, the petition has collected over 7,700 signatures. So, what are dark pools?

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Dark pools are private exchanges for stock transactions that are not accessible to the general public. The name “dark pool” comes from the lack of transparency surrounding them. With that in mind, let’s jump into the details.

What Are Dark Pools? 10 Things to Know.

  1. Examples of dark pools include Morgan Stanley’s (NYSE:MS) MS Pool and Goldman Sachs’ (NYSE:GS) Sigma X.
  2. Institutional investors primarily use them to enact large trades, or block trades. These institutions can possibly receive a better price for their trades on the dark pool than on the open market.
  3. Furthermore, they are advantageous to institutional investors because there are no exchange fees.
  4. Buyers and sellers exist in dark pools looking for a specific trade at a specific price.
  5. In addition, when block trades are enacted over the dark pool, the details are released to the consolidated tape after a delay.
  6. As a result, the “market impact is significantly reduced for large orders” when conducted through a dark pool.
  7. There are three types of dark pools: broker-dealer-owned, agency broker or exchange-owned, and ones owned by independent operators.
  8. A concern surrounding dark pools is that stock prices on public markets may not reflect the actual price at all times. For example, imagine an institutional investor sells a large portion of stock X. That trade may not be reflected on the actual stock price until the dark pool trade is disclosed.
  9. Dark pool operators have engaged in misconduct in the past, such as front-running trades. Securities regulators have received more than $340 million from these operators since 2011 to settle various allegations.
  10. The bottom line is that dark pools can provide pricing advantages to institutional investors. However, the lack of transparency can create conflicts of interest for dark pool owners — and hurt retail traders in the process.

On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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