How Are Dark Pools Different From Regular Stock Exchanges?
As you know, stock exchanges offer a platform to the primary markets where various public organizations raise capital by converting the investor’s saving into productive ventures. Unlike stock exchanges, investing public cannot access dark pools. Because of their complete lack of transparency, they are also called dark pools of liquidity. But dark pools are vulnerable to conflicts of interest by the traders due to lacking transparency. Dark pools are primarily used by investors for block trading, as they do not prefer to impact the market with their orders and obtaining adverse prices.
This lack of transparency can actually favor an investor as it can result in a better price. There is no order book visible to the public since investors participating in a dark pool do not reveal the intention of their trading to the exchange before executing it. In dark pool, there is a better chance for an institutional seller to get a buyer for the full share block since large investors participate in it. There is also a possibility of the price improving.
To buy pension funds and mutual funds, one can get pricing and cost advantages through dark pools. Eventually, the investor who owns the fund gets the benefits. Dark Pools do not require paying any exchange fees and hence transaction costs are lower. Fincrowd App is an auto trading platform that can help you to earn using a dark pool and make a huge profit.
Types of Dark Pools
There are mainly three types of dark pools. They are the following:
- Broker dealer owned: In this case, large brokers and dealers set up dark pools for clients. They also involve proprietary traders of their own. There is an element of price discovery since the prices of these dark pools are derived by themselves from the order flow. Here are some examples of dark pools including Goldman Sachs’ Sigma X, Credit Suisse’s Cross Finder, Morgan Stanley’s MS Pool, Citi Cross and Citi Match.
- Agency broker/exchange-owned: Such types of dark pools do not act as principals but act as agents. There is no price discovery since the price is derived from exchanges. Some of the agency broker dark pool examples include Liquidnet, Instinet, ITG Posit. And some examples of dark pools that are exchange owned are NYSE Euronext and BATS Trading.
- Electronic market makers: Independent operators operating as principals for their trading accounts offer such dark pools. There is a price discovery just like the broker-dealer owned dark pools.