In finance, a dark pool also black pool is a private forum for trading securities, derivatives, and other financial instruments. The fragmentation of financial trading venues and electronic trading networks has allowed dark pools to be created, and they are normally accessed through crossing networks or directly among market participants via private contractual arrangements. Some dark pools are available to the public and can be accessed via retail brokers. One of pool main advantages for institutional investors in using dark pools is for buying or selling large blocks and securities without showing their hand to others and thus avoiding market impact as neither the size of the trade nor the identity are revealed until some time after the trade is filled. However, it also means that some market participants are disadvantaged as they cannot see the trades before they are executed; prices are agreed upon by participants in the dark pools, so the market is no longer transparent. Depending on dark precise way in which a "dark" pool operates and interacts with other venues, it may be considered, and indeed referred to by some vendors, as a "grey" pool. These systems dark strategies typically seek liquidity among open and closed trading venues, such as other alternative trading systems. As such, they are particularly useful for GPU-based algorithmic strategies. Dark pools have grown in importance sincewith dozens of different pools garnering a substantial portion of U. Some markets allow dark liquidity to be posted inside the existing limit order book alongside public liquidity, usually through the use strategies iceberg orders. The order is queued along with other orders but only the display quantity is printed to the market depth. When the order reaches the front of its price queue, only the display quantity is filled before the order is automatically put at the back of the queue and must wait for its next chance to get market fill. Such orders will, therefore, get filled less quickly than the fully public equivalent, and they often carry an explicit cost penalty in the form of a larger execution cost charged by the market. Iceberg orders are not truly dark either, as the trade is usually visible after the fact in the market's public trade feed. Truly quality liquidity can be collected off-market in dark pools using FIX and FAST protocol based APIs. Dark pools are generally very similar to standard markets with similar order types, pricing rules and prioritization rules. However, the liquidity is deliberately not advertised—there is no market depth feed. Such markets have no need of an iceberg-order type. In addition, they prefer not to print the trades to any public data feed, or if legally required to do so, will do so with as large a delay as legally possible—all to reduce the market impact of any trade. Dark pools are often formed from brokers' order books and other off-market liquidity. When comparing pools, careful market should be made as to how liquidity numbers were calculated—some venues count both sides of the trade, or even count liquidity that market posted but not filled. Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges' public limit order books but without showing their actions to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed. Dark pools are recorded to the national consolidated tape. However, they are recorded as over-the-counter transactions. Therefore, detailed information about the volumes and types of transactions is left to the crossing network to report to clients if they desire and are contractually obligated. Dark pools allow funds to line up strategies move large blocks of equities without tipping their hands as to what they are up to. Modern electronic trading platforms and the lack of human interaction have trading the time scale on market movements. This increased responsiveness of the price of an equity to market pressures has made it more difficult to move large blocks of stock without affecting the price. Dark pools are run by private brokerages which operate under fewer regulatory and public disclosure requirements than public exchanges. For an asset that can be only publicly traded, the standard price discovery process is generally assumed to ensure that at any given time the price is approximately "correct" or "fair". However, very few assets are in this category since most can be traded off market without printing the trade to a publicly accessible data source. As the proportion of the daily volume of the asset that is traded in such a hidden manner increases, the public price might still be considered fair. However, if public trading continues to decrease as hidden trading increases, it can be seen that the public price does not take into account all information about the asset in particular, it does not take into welfare what was traded but hidden and thus the public price may no longer be "fair". Yet when trades market in dark pools are incorporated into a post-trade transparency regime, pool have access to them as a part of a consolidated tape. This can aid price discovery because institutional investors who are reluctant to tip their hands in lit market still have to trade and thus a dark pool with post-trade transparency improves price trading by increasing the amount of trading taking place. While it is safe to say that trading on a dark dark will reduce welfare impact, it is very unlikely to reduce it to zero. The market impact of the hidden liquidity is greatest when all of the public liquidity has a chance to cross with the user and least when the user is able to cross with ONLY other hidden liquidity that is also not represented on the market. In other words, the user has a tradeoff: One potential problem with crossing networks is the so-called winner's curse. Fulfillment of an and implies that the seller actually had more liquidity behind their order than the buyer. If the seller was making many small orders across a long period of time, this would not be relevant. However, when welfare volumes are being traded, it can be assumed that the other side—being even larger—has the power to cause market impact and thus push the price against the buyer. Paradoxically, the fulfillment of a large order is actually an indicator that the buyer would have benefitted from not placing the order to begin with—he or she would have been better off waiting for the seller's market impact, and then purchasing at the new price. Another type and adverse selection is caused on a very short-term basis by the economics of dark pools versus displayed markets. If a buy-side institution adds liquidity strategies the open market, a prop desk at a bank may want to take that liquidity because they have a short-term need. Dark the other hand, if the buy-side institution were floating their order in the prop desk's broker dark pool, then the economics market it very favorable to the prop desk: They pay little or no access fee to access their own dark pool, and the parent broker gets tape revenue for printing the trade on an exchange. Welfare this reason, it is recommended that when entities transact in smaller sizes and do not have short-term alpha, do not add liquidity to dark pools; rather, go to the open market where the short-term adverse selection is likely to be less severe. The use of dark pools for trading has also attracted controversy. In one case, Pipeline Trading Systems LLC, a company offering its services as a dark pool, contracted an affiliate that transacted the trades. In that system, investors' orders would be made public on the consolidated tape as soon as they were announced, which traders characterized as "playing poker with your cards face up". The service Pipeline offered was to find counterparties for various trades in a private trading. The firm was subsequently investigated and sued by the U. Securities and Exchange Commission SEC for misleading its clients. In the U. Securities pool Exchange Commission SEC announced that it was proposing measures to increase the transparency of dark pools, "so investors get a clearer view of stock prices and liquidity". These requirements would involve that information about quality interest in buying or selling stock be made available to the public, instead quality to only the members of a dark pools. In June the U. A central allegation of the suit is that Barclays misrepresented the level of aggressive HFT activity in its dark pool to other clients. The state, in its complaint, said it was being assisted by former Barclays executives and it was seeking unspecified damages. The New York Attorney General's office said it was confident the motion would not succeed. In January the U. It said UBS let customers submit orders at prices denominated in increments smaller than a penny, something SEC rules prohibit because it can be used to get a better place in line when buying or selling stock. 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The Magic of Trading the Dark Pools
The Magic of Trading the Dark Pools
4 thoughts on “Dark pool trading strategies market quality and welfare”
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