Just noticed that last post was from 2016 - here's something more current:
Dark pools, more loosely regulated trading venues in the United States, are becoming increasingly popular. Advocates for these trading venues claim they boost market liquidity while lowering risk, while critics claim their lack of transparency leaves them open to predatory practices. Despite their controversy, dark pools have taken the U.S. by storm, capturing over 40% of average daily market share and reaching as high as 50% on some days in the U.S., while in countries like Canada, they amount for only 7% largely due to a higher standard of regulation. Nasdaq Canada’s CEO, Dan Kessous, and Rosenblatt Securities Partner, Justin Schack, weighed in on the stark differences in market participation and the use of dark pools in U.S. and Canada. In a recent TradeTalks segment, they discussed how dark pools operate, the benefits and concerns of these venues on the market, and how governments will regulate them in the future.
The Primary Reason for Using Dark Pools
When institutional investors need to trade large swaths of shares, these orders tend to have a large impact on the market. For example, if a company is selling 1 million shares of a security, trading these shares on a public exchange may result in a large decrease in the stock price, creating greater volatility in the market and an inferior execution price for the investor.
The problem of price volatility that can result from trading large institutional sized orders was accentuated when trading became electronic. Faster trading means faster changes in the market. Today, market price changes happen in milliseconds.
However, if a company can find buyers, sell its bulk stock privately, and later disclose these sales to the public, market prices will see less price impact ultimately reducing risk and resulting in the investor selling at a higher price.
According to Schack, “You have a very large order that can sometimes move the market. Going into the dark marketplace can minimize that footprint, keep you anonymous and result in better execution quality. Then the market makers on the other side of those retail orders are taking less risk. It's less risky for them than it would be to put a quote on an exchange marketplace. So, a lot of times you can get a better outcome, and that's why we see a lot of different types of market participants using these dark marketplaces.”
The Pros and Cons
Many proponents of dark pools including buy-side institutions such as mutual funds and pension funds advocate for the cost advantages of these trading venue’s – by facilitating better execution prices retirement accounts can continue to accrue value, which is then directly translated to the retail investor with a 401k, pension, or other retirement account.
But dark pools are not universally supported by all market participants. Critics complain that their lack of transparency is worrying and that this is made worse by the fact that they are increasingly not being used for their original purpose—minimizing market impact when trading large orders. Celent, a firm that advises on financial technology, found that from 2009 to 2013, the average execution size traded on dark pools in the United States dropped by more than half, from 430 to 200.
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