What Are Dark Pools?

Dark pools are anonymous investment venues not open to members of the general public. Institutional and large investors are the most likely to be active in these alternative investment vehicles. While not illegal, they can cause concern for regulators, and in some nations agencies monitor activities in this area of the investment community with care. Access to these investments can be limited by capital requirements and other measures, ensuring that only large scale, experienced investors can be active in a dark pool.

Within the pool, which may be run by a brokerage or another financial institution, buyers and sellers match up anonymously through the pool's trading system. Keeping identities concealed can allow investors to make big buys and sales without necessarily triggering market movements. This can be a concern on open markets, where a large trade will be noticed by other investors and can cause panic or disruption. Investors who want to act without tipping their hand may do so through a dark pool.

No quotes are published about current prices in dark pools, and members of the public cannot freely access trades in the pool, let alone the details of the investment vehicle. To enter, investors may do so through a broker or private institution that runs the pool or has connections to it. Essentially, the dark pool acts as a private trading venue for those who need to execute large, complex, or confidential trades for any number of reasons. Private trading is permitted under securities regulations in most nations, and dark pools provide an organized method for doing so.

Concerns about dark pools surround the potential inequality that could be set up with such systems. When not every trader has access to information, some traders may be able to act on news that is not available to members of the general public. This could create an unfair advantage and in some cases might constitute insider trading. Speculation in dark pools can create bubbles and other events just as it can on the open market, but regular investors might be caught entirely unaware because the trades took place behind closed doors.

The numbers of these investment vehicles grew dramatically in the early 2000s, attracting attention from well outside the investment community. Examples can be seen in both US and European markets. Agencies with an interest in this subject have used rule making abilities to set some guidelines for activity within dark pools to minimize potential concerns.