A dark pool is a financial term that describes an alternative – but legal – venue for trading large orders of stock. What makes trading through a dark pool different from regular trading? Well, there are a few key differences, but the most important is anonymity. When a trade occurs on an exchange like the New York Stock Exchange, the prices that are negotiated between buyer and seller are immediately reflected in the market and published for anyone to see. In a dark pool, there is actual anonymity between the buyer and the seller and the trade is not shown in the market.

In a dark pool, trades occur between institutional investors that are trading large blocks of equities. For example, Institution A has 500,000 shares of Microsoft (MSFT) and wants to sell them. If that institution were to trade all of those shares on an exchange, they would have to split the transaction up into several smaller trades in smaller amounts. Not only would those trades disrupt the market (make it unsettled), but Institution A would also be showing their hand. If they show their hand, it might disrupt the market further, and other institutions would likely capitalize on that information.

So basically, a dark pool is a place where institutional investors can come and anonymously buy and sell large blocks of equities in one or a few orders. By doing this away from an exchange, they do not disrupt the market because the price is not fixed on a public market. Also, other institutions and the public do not know immediately that a large block of stock was bought or sold. Only after the trade is filed with the SEC will the public know what the institution did.

Tags: anonymity, buy, dark pool, institutional investing, sell, trading