A dark pool (or dark pool of liquidity) is a private electronic transaction network, typically maintained by major banks and securities companies, where stocks are bought and sold by clients of those companies. Because the matching of buyer and seller is done entirely within the control of the bank, the bid, offer and sale prices are not published to exchanges (such as the NYSE).
Dark pool operators have the ability to route orders either to an exchange or to their own private network, depending on availability, pricing and client preference.
Dark pools range from completely opaque to semi-transparent, and their order flow can range from transient to stationary. The more transparent the liquidity pool, the easier it is to be manipulated. More-transparent crossing networks, such as Liquidnet, solve this problem by not letting brokers or more-active traders onto the platform and by policing their community and evicting poachers. Other crossing engines with some transparency, such as Pipeline or Posit, give away such limited information that it is difficult to take advantage of. The majority of dark pools, however, tend to be completely dark and either match order flow periodically or continuously as orders flow to traditional exchanges. Markets such as Posit, Instinet or the Nasdaq Cross fit this description.
Pros and Cons of Dark Pools
The companies who provide dark pools gain a double benefit of collecting transaction fees from brokers and shareholders, and at the same time not incurring exchange transaction costs. Brokers also generally pay lower transaction fees to access dark pools.
Clients of the dark pool companies sometimes favor execution out of the public eye, whether to protect their trading strategies from reverse engineering, or simply to complete their transaction without having their volume create a major price change in the public market.
The established exchanges are beginning to lose substantial transaction volume to dark pools, creating a conflict. While the exchanges are in competition to regain that lost volume, the dark pool operators are still in many cases major clients of the exchanges, routing a large volume of non-dark orders to the traditional system.
Some believe that dark pools take away the opportunity to play on a fully level field, in an environment where public participants must have their bids, offers and prices visible to all, yet selected institutional entities may create transactions that are hidden. For example, at a SIFMA conference in May 2009, James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, said dark pools could impair price discovery by drawing valuable order flow away from the public quoting markets. Proponents of dark pools say the competition the venues provide has kept trading prices on exchanges in line, and that if dark pools did not exist, trading prices would likely be much higher.
There are around 50 dark pools in the United States and 13 stock exchanges.
The dwindling market share at U.S. equity exchanges prompted them to ask regulators to curb off-exchange markets such as dark pools. In July of 2013, the board of the Financial Industry Regulatory Authority approved a plan to require U.S. dark pools to boost disclosure about the amount of volume they handle for each stock. They will also be assigned unique identification codes making it easier to track where each transaction takes place.
About a third of U.S. equity volume in 2013 took place off exchanges, according to data compiled by Bloomberg.
By mid June of 2009, there was some evidence that venues with high concentrations of retail and high-frequency activity consolidated their hold on the top ranks of dark pools measured by volume. Credit Suisse’s Crossfinder, for example, grew its average daily volume by 10.3 percent, to 147.7 million shares (adjusted to eliminate multiple counting), passing GETCO Execution Services (GES) and Goldman Sachs’s Sigma X to become the country’s biggest dark pool in May.
In September of 2010, Nasdaq OMX was given regulatory approval to launch a new platform aimed at dark pool investors. Known as PSX, the platform will attract traders wanting to carry out large orders by offering incentives for such orders to be posted. The launch is in response to developments in the equity markets that offer pre-trade price displays called "lit" models in contrast to dark pools.
Nasdaq isn't the only one providing tools to navigate dark pools. Also in September of 2010, Fidessa released the Fidessa Fragmentation Index (FFI) and Fragulator products to offer an immediate view of the complete trading patterns of various financial instruments on exchanges, alternative trading systems, dark pools and OTC venues. 
Dark Pool Operators
Independent Dark Pools
- Instinet Crossing
- Liquidnet H2O
- Investment Technology Group (ITG)
- NYFIX Millennium
- Pipeline Block Board
- Block Cross
- BIDS Holdings
Broker-Dealer-Owned Dark Pools
- Dark is Hot. But Is It Good?. wallstreetandtech.
- The secret stock market. Dow Jones MarketWatch.
- Top SEC Trading Chief Takes Aim at Dark Pools. Traders Magazine.
- Credit Suisse's Crossfinder dark pool gets darker. Reuters.
- Dark Pools Face New U.S. Disclosure Requirements from FINRA. Bloomberg.
- Let There Be Light. Rosenblatt Securities.
- Nasdaq OMX to Launch New Platform. FT.
- Fidessa’s ‘Fragulator’ goes global. FT.