We're supposed to get the best price reasonably available, not just a good price. When we buy or sell a stock, our broker is required to provide us with best execution. "Our broker sends our order to what's often called a wholesaler in the dark market We may wonder why a wholesaler is willing to pay to trade with us. His quote describes what happens when a buy order is placed in a brokerage app: Here's what he said in a March 2022 video. It's instructive to hear from no less than the chair of the SEC, Gary Gensler, to describe how dark pools and payment for order flow works. Dark Pools & Payment For Order Flowįor another point, it's worth discussing payment for order flow, and how it relates to dark pools. These firms operate strategies which typically trade thousands of times per day, and thus benefit from minor savings in price and fees versus routing orders through a public stock exchange. The results of dark pool trades aren't immediately posted outside of the pool either, so heavy volume in a dark pool won't scare other market participants.ĭark pools are also useful for high-frequency trading shops. Putting that block of stock for sale on a dark pool avoids notifying other market participants. If a mutual fund puts a 5 million share sell order on the Nasdaq, the price of the security would likely drop sharply as other traders raced to sell first. For one, bids and asks aren't widely quoted, as they are on public exchanges, making it easier for large mutual or hedge funds to transact in big blocks of stock without unnerving the market. However, they offer some advantages for institutions. In essence, these dark pools function like normal stock exchanges, in that they bring buyers and sellers together. However, at its core, a dark pool is simply a private exchange where investors can trade shares without having those transactions show up on a major stock exchange. Many investors have a negative perception of dark pools, and in some cases, that's understandable. In popular language, these forums for trading are often referred to as dark pools. However, what are known as alternative trading systems (ATS) rose to prominence in 2005 when the SEC enacted Regulation NMS which created a clearer regulatory framework for off-exchange trading. According to an SEC statement, off-market trading began in the late 1960s. Da-kuk/E+ via Getty Images What Is a Dark Pool?Ī dark pool is a private market where institutions can trade securities without having to route their orders to a public stock exchange.
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