A dark pool of liquidity, or crossing network, is a trading venue in which large orders can be placed without making them visible to the market. The trades are usually reported after orders have been executed.
Dark pools are controversial because:
- they are less transparent than stock exchanges which leads to unequal access to information,
- they draw liquidity away from stock exchanges, affecting prices on the exchanges, and,
- they are often operated by investment banks that have proprietary trading and other businesses, that could benefit (unless effective Chinese walls are in place) from access to information about current bids and offers.
Dark pools vary a great deal in how they operate, and in how effective they are in keeping orders dark. For example, some dark pools act as market makers, while other act more like exchanges, matching orders. Some dark pools do not accept IOC orders in order to prevent high frequency traders from using these to ping the market to find out limit prices, whereas others rely on surveillance, or even take few precautions. There are many other variations in dark pools they operate.
Apart from secrecy, the most important advantage of dark pools is cost. Like all alternatives to the public markets, they are cheaper. As many are operated by brokers, or consortia of brokers, they can be seen as method for brokers to internalise business in the same way as an agency cross.