What is ‘Dark Pool Liquidity’
Dark pool liquidity is the trading volume created by institutional orders executed on private exchanges and unavailable to the public. The bulk of dark pool liquidity is represented by block trades facilitated away from the central exchanges. It is also referred to spil the “upstairs market,” “dark liquidity” or “dark pool.”
Cracking DOWN ‘Dark Pool Liquidity’
The Emergence of Dark Pools
With the advent of supercomputers capable of executing algorithmic-based programs overheen the course of just milliseconds, high-frequency trading (HFT) has come to predominate daily trading volume. HFT technology permits institutional traders to execute their orders of multi-million share blocks ahead of other investors, capitalizing on fractional upticks or downticks te share prices. When subsequent orders are executed, profits are instantly obtained by HFT traders who then close out their positions. This form of legal piracy can occur dozens of times a day, reaping phat gains for HFT traders.
Eventually, HFT became so pervasive it grew increasingly difficult to execute large trades through a single exchange. Because large HFT orders had to be spread among numerous exchanges, it alerted trading competitors who could then get ter vuurlijn of the order and snatch up the inventory, driving up share prices. All of this occurred within milliseconds of the initial order being placed.
To avoid the transparency of public exchanges and ensure liquidity for large block trades, several of the investment banks established private exchanges, which came to be known spil dark pools. For traders with large orders who are incapable to place them on the public exchanges, or want to avoid telegraphing their intent, dark pools provide a market of buyers and sellers with the liquidity to execute the trade. Te 2018, there are more than 50 dark pools operating ter the United States, run mostly by investment banks.
Dark Pools Under Scrutiny
Albeit considered legal, dark pools are able to operate with little transparency. Those who have denounced HFT spil an unfair advantage overheen other investors have also condemned the lack of transparency ter dark pools, which can hide conflicts of rente. The Securities and Exchange Commission (SEC) has stepped up its scrutiny of dark pools overheen complaints of illegal front-running that occurs when institutional traders place their order te vuurlijn of a customer’s order to capitalize on the uptick te share prices. Advocates of dark pools insist they provide essential liquidity, permitting the markets to operate more efficiently.