What is a dark pool, and how does it match orders nobody can see?

A dark pool is a private trading venue, a kind of alternative trading system, where orders are not shown to anyone before they are matched. Think of an ordinary stock exchange as a shop window: every price someone is willing to pay or accept is on display. A dark pool is the back room, where big buyers and sellers can find each other without announcing what they want. Most of the trades there are large ones by financial institutions, offered away from public exchanges such as the New York Stock Exchange and the Nasdaq so that they stay confidential.

The reason is the problem of market impact. A fund that tried to sell a huge block of shares on the public market would show its hand, and the price would move against it before it finished. In a dark pool neither the size of the trade nor the identity of the trader is revealed until some time after the trade is filled. The venue looks like a normal market inside, with ordinary order types and rules, but the liquidity is deliberately not advertised: there is no market depth feed.

So what price do the trades happen at? Without a visible book, a dark pool borrows its price from the public market. One way is the midpoint, the average of the best bid and the best ask. That can be a better deal for both sides than crossing the spread: the buyer pays less than the best offer and the seller receives more than the best bid. Since the midpoint is halfway, each side saves half the spread.

Dark pools are not secret in every sense. Trades are reported afterwards, with a delay, so they still feed into the public record of prices. And ordinary savers are not locked out: retail investors may reach dark pools indirectly through their brokers. Who runs these venues, and how much they are trusted, is another story.