What is Dark Pool Trading: Top 10 Dark Pools in 2024

Get to know what is Dark Pool Trading, who uses it, and how it operates with the Top platforms you can use. Review and compare to pick the best Dark Pool of your choice:

A dark pool is a private alternative trading system that facilitates the legal trading of large blocks or huge amounts of assets like cryptocurrencies and securities away from the public eye or off the public exchanges.

This way, traders are unable to reveal the intentions for the placed trades when they are searching for buyers and sellers. Dark pools for trading securities are registered with the Securities Exchange Commission in the United States.

Dark Pool Trading – A Detailed Study

Dark pool trading is mainly done by institutions including mutual funds and pension funds which pass the benefits to retail investors that invest in these funds.

Such trading provides these institutions with price and cost advantages. This is because they are privately organized and are housed within a large firm and not necessarily a bank. It also prevents asset price devaluation, especially in markets like crypto where large block trades can heavily influence price directions if broadcast before they are executed.

However, it lacks transparency and is susceptible to conflicts of interest by predator traders and dark pool owners.

This tutorial revolves around understanding dark pool trading, what it is, who uses it and why, how it operates, how to use it, and the most dominant dark pools and platforms you can use.

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Categories of Dark Pools

Broker-dealer dark pool: These types are run by broker-dealer institutions to serve their customers. The institution may also have its proprietary traders in these pools. The prices of the assets are decided from the order flow.

Examples include CrossFinder run by Credit Suisse, Sigma X owned by Goldman Sachs, CitiMatch by Citibank, and MS Pool by Morgan Stanley.

Those owned by agency brokers or exchanges: As goes the name, the dark pool acts as an agent, not the principal. The pools are also sometimes owned by the exchanges. They derive the price of the assets from exchanges. That’s because the prices may be calculated by the National Best Bid and Offer (NBBO).

Examples of agency broker dark pools include ITG Posit. Others are Instinet and Liquidnet darkpools. Some examples of exchange-owned ones include those owned and run by NYSE Euronext and BATS Trading.

Electronic market maker dark pools: These types are run by independent operators and hence act as principals themselves. They have a price discovery because the prices of assets sold are not calculated by the NBBO. Examples include dark pools run by Getco and Knight.

Cryptocurrency dark pools: These are similar to those in the stock market and securities. They operate to match buyers and sellers of large dark pool orders without using a public order book. Most of them, though, are decentralized and use smart contracts over a block-based program.

Centralized and decentralized dark pools: Centralized dark pools are the most common and rely on a centralized order book and routing and matching methods. That means the order book rests on a database, cloud-based or otherwise.

Decentralized dark pools are based on blockchain and other decentralized ledger technologies. They use smart contracts to break large dark pool orders into fragments, routing, and matching client dark pool orders. As such, they may be cheaper and match more efficiently.

How Dark Pools Work

• Dark pools, including crypto dark pools, involve a platform/broker/market that connects buyers with sellers. Sellers and buyers place trades in these markets as per the rules of the broker. Some are owned by the exchanges. Sellers and buyers are matched based on the best bid and ask prices.
• They ensure that there are no slippages during the trades. Hence the trades are executed at the intended price. Thus, they are effective in illiquid crypto and securities markets.
• Dark pools are ineffective for most retail investors since these traders do not need the privacy and anonymity associated with dark pools. Trades also won’t cause a significant shift in retail prices.
• Dark pools may have better verification techniques, trust, and other protocols that help secure funds for investors and traders dealing with huge volume orders at once.
• Traditional dark pools tend to promote unethical behavior. Hence some of these have been solved by the innovation of decentralized dark pools that promote transparency to a great deal by way of smart contracts and automation. They also promote trading efficiency. They also promote the security of the funds.

Why Dark Pool Investing

• The first and most outstanding advantage of using dark pool trading is price and cost advantages. Assets are sold at a lower price and the trading fee is lower. In addition, traders do not pay transaction fees in the dark pools.
• It provides a platform for institutional traders to afford liquidity for their trades just like over-the-counter trading. Ordinarily and through public exchanges, such trades would have to be spread across multiple exchanges. Spreading trades this way used to cost a lot of money in trading fees.
• It prevents price pumps and deflation that happen if people become aware that a whale would be making large moves in trading an asset.
• Additionally, price pumps would traditionally arise when dark pools did not exist and therefore large trades were being spread across multiple exchanges to afford liquidity for the trade. Trading competitors would become aware of the moves and get in front of the order to snatch up the inventory, thus driving up the prices. This necessitated the development of dark pools. Another alternative was to work the order through a floor trade over a one- or two-day period, with the trader hoping that he would get a good volume-weighted average price. The other alternative would be the trader trading the asset bit by bit on one exchange until the shares were complete. The latter exposed traders to price variations over time.
• Dark pools are also used to hide the intent of the buyer and seller before the trade is executed. This may render other benefits beyond preventing price pumps and volatility for the assets in question. They may prevent price overreactions and underreactions.
• Dark pools are also used for high-frequency trading of large blocks of trade. High-frequency trading is very hard to do with large orders or blocks of trades because of a lack of liquidity. High-frequency trading by bots allows traders to capitalize on small price changes for the assets involved. Bots, for instance, can analyze and scan markets and perform hundreds of trades within seconds and make profits from these trades.
• It is also done privately as part of public exchanges to provide liquidity to other smaller traders. They can also be taken as improving market efficiency through high-frequency trading.
• It may also work to positively prevent price manipulations on public exchanges. They are hidden from the public eye until after execution and reporting and therefore, this way, reduce the chances of the traders to manipulate markets.
• Without slippage, dark pools ensure that crypto or assets are traded by investors at the expected price.

List of the Best Dark Pools

Popular list of dark pool trading platforms:

1. SFOX
2. CrossFinder
3. LX Barclays
4. Sigma X
5. CitiMatch
6. MS Pool
7. Republic Protocol

Comparison Table of Top Dark Pool Trading Tools

Detailed Reviews:

#1) SFOX

SFOX is a dark pool platform that provides users with hidden liquidity trading access. Customers can trade across dark pools, OTC, and public liquidity with zero slippage and use advanced and automatic premium orders. Traders can place orders either only in the dark pool or across major global liquidity providers.

SFOX Pro is a platform dedicated to trading crypto by professionals and institutions.

Features:

• Centralized crypto order book. 80 crypto markets.
• Advanced order types include those that allow you to reduce crypto trading risks.
• Post-trade analytics.
• Traders can buy crypto using fiat currencies.
• Multi-user accounts. Separately managed accounts.
• iOS and Android apps.
• Full order booking visibility to achieve transparency.
• Sniper and Polar Bear order types.
• API.

Pros:

• Support buying with fiat.
• Instant order execution.
• Multiple order types depending on volume.
• Access to liquidity from over 30 exchanges.
• Test accounts to test APIs, trades, and algorithms.

Cons:

• No clear information about the co-founders and who runs the website/exchange.
• Not so good reviews online, including from people who have or know people who have used the exchange.

Website: SFOX

#2) CrossFinder

CrossFinder is arguably the world’s largest dark pool stock trading market in the world and is run by Credit Suisse. The latter is a leading financial services and wealth manager, private banking and advisory company. The dark pool was launched in 2004 and is accessible to clients globally, including in the United States.

The company no longer provides data to Tabb Group and Rosenblatt Securities about the pool volumes. Credit Suisse also owned and operated the Light Pool dark pool, which has since been shut down. It was also launched in 2011 but unlike Crossfinder, it was a displayed alternative trading system.

Features:

• Routing is decided based on 15 factors including average daily volume, depth of book on displayed venues, heat maps for dark venues, intraday volume, etc.
• Periodic venue analysis to determine areas for change — including fill position in a spread versus intent, fill rate, fill size, latency, etc.
• Manage order types, minimum fill sizes, price pegs, and select counterparty. Users, for instance, can set the minimum acceptable quantity below which the Crossfinder cannot match. They can also set a dynamic minimum acceptable quantity.
• Participants are categorized per the nature of their order flow. They are then measured for negative selection.
• Orders are matched within/or at the Bid/Offer Spread.
• Transaction analysis is available upon request.
• It categorizes participants and identifies those contributing to negative price selection. The categories include Natural — those orders that trade through AES or via Sales Trading desks unless categorized as LiquidityPlus. LiquidityPlus categories of orders are orders flowing from internal principal desks, external brokers, dark aggregators, and systematic trading participants. The opportunistic category is determined using the Alpha Score Card and Gamefider methodologies.

Pros:

• Completely anonymous trading. Order confidentiality is also guaranteed as only employees can gain access to the database.
• Options for private as well as public orders (these are routed to exchanges or other lit venues but are still simultaneously available for trading in Crossfinder).
• Risk protection against negative price selection by identifying opportunistic traders.
• Monitoring to deal with conflict of interests. Internal controls are designed to prevent anyone from accessing the orders.
• Multiple order types including advanced order types.
• Execution priority based on fees.
• It has a huge list of venues where orders can be routed. Transparency regarding the list of venues and how dark trading happens here.
• Data feeds from all market centers.

Cons:

• Transparency is still an issue.

Website: CrossFinder

#3) LX Barclays

LX dark pool stock market is provided by the bank through the Barclays Equities electronic trading system and is accessible in the United States, Japan, and Europe. It provides, for trading, access to the US National Market System securities, pan-European securities for Europe, and Topix universe in Japan.

Features:

• Simple to advanced order types.
• Client reports are provided upon request. Activity is reported to regulatory agencies.
• Order protection through a system that polices participants and manages segments based on behavior. The liquidity profiling tool scores participants based on flow characteristics and conditional order support for block liquidity.
• Liquidity is sought from all dark including LX, through the Hydra algorithm.
• Full-spread trading and participants can post sub-tick size orders in Europe and Japan.

Pros:

• LX is run by a renowned banking institution.
• Participant profiling to prevent malpractice in price selection. Order protection provided.
• Multiple order types including advanced.

Cons:

• Transparency is still an issue.

Website: LX Barclays

#4) Sigma X

Owned by Goldman Sachs, Sigma X dark pool stocks market sees an average daily trading volume of $136 million and execution of about 2,837 million shares. According to a report from Goldman Sachs, the dark pool is utilized by institutions that include equity and options, market makers and specialists, and introducing brokers.

It is offered through the FIX connection to direct subscribers although participants can also access it indirectly, for instance through ATS and non-ATS GSCO algorithms or the GSCO Direct Market Access for routing orders to sigma X.

Features:

• Prices are relative to NBBO. They are determined at the time of execution. The NBO is constructed by an Operations and Compliance Network which is a third-party provider of LX. They are constructed using a combination of many market data feeds and market data disseminated by the Securities Information Processors constructed NBO. If the latter has issues, the prices will/be determined solely by the NBO designated by the SIPs.
• The system access orders are based on time priority for purposes of matching orders either liquidity-providing or liquidity-taking orders.
• Customized solutions and dark pool trade strategies to determine where to route orders.

Pros:

• Reporting on volumes, shares, trade sizes, block metrics, and shares by industry.
• Large volumes and liquidity.
• Customized order routing and conditional orders.

Cons:

• Centralized order routing creates problems with transparency.

Website: Sigma X

#5) CitiMatch

The dark pool is owned and run by Citibank which scrutinizes and screens participants to ensure they are providing quality liquidity to the pool. Clients of the pool benefit from the bid, mid, and ask price points and thus they can get paid the spread by providing liquidity.

Citi segments clients according to liquidity and toxicity to improve price selection. It also ensures that information leakage is minimized through necessary safeguards. It employs anti-gaming controls and restricts types of counterparties that interact with the pool. This assures order protection.

Features:

• Algorithmic dark pool trade strategies are accessible directly from the order or execution management systems.
• Liquidity aggregation and interaction from different participants.
• Anonymous crossing.
• Order priority on basis of a lower price for sale and a higher buy price. Agency orders prioritized or principal orders. Finally, orders can be prioritized based on the time they came in.

Pros:

• Huge number of participating institutions ensures high liquidity.
• Identity verification on the centralized platform ensures proper practice.
• Ability to customize interaction with the pool. Ability to customize order flows — including crossing quantities, limiting cross-price to near-to-mid price or better.
• Performance enhancement for the liquidity algorithms.
• Privacy of trading and information.

Cons:

• Centralized dark pools still carry issues of transparency or malpractices as proved in the past through prosecutions by U.S. regulators.
• Fewer order types.

Website: CitiMatch

#6) MS Pool

MS Pool by Morgan Stanley matches orders relayed to the dark liquidity pool at or within the best bid or offer, attempting mid-point execution or as close to mid-point as possible. It emphasizes order size over speed, thus it employs price/capacity/size/time matching priority.

Morgan bank also provides data about the pool’s matched shares, trade sizes, execution block statistics, and other information. The institution also runs the MS Trajectory Cross, a dark pool that matches orders over time intervals for orders that can be handled by certain algorithms.

Features:

• Price execution occurs at occur at the midpoint of the best bid and offer. This provides price improvement for all orders.
• Accepts conditional dark pool strategies.

Pros:

• Customization of minimum fill quantities and order sizes. It also accepts conditional orders.
• Publication of statistics.
• Provides specifications on the platform.
• Price improvements for orders through execution.

Cons:

• Two order types – limit and market.

Website: MS Pool

#7) Republic Protocol

Republic Protocol employs atomic swap innovations in the dark pool of cryptocurrencies. Not only does atomic swap allow users to exchange crypto for another very quickly but it also achieves very low trading fees.

Atomic swaps also allow traders to trade directly with each other (so-called peer-to-peer trading) without counterparty risks because it is non-custodial. This way, it also ensures anonymous trading. The exchange utilizes Multiparty Computation Protocol (MPC) engines.

This protocol takes in large orders and splits them into multiple smaller orders which are then matched to other buyers/seller orders. The orders are then recompiled back to the initial single large order after being executed.

This improves security (by preventing Sybil attacks), privacy, and anonymity of orders as it can be difficult to trace their origin once split up. But it also eases liquidity.

Features:

• Supports 30 assets.
• Order trading fees are paid in REN which is a Republic Protocol platform token. If the order expires before execution, it is refunded.
• Order fee is variable and those orders with a higher variable fee are prioritized in the matching engine.
• Interchain liquidity. The platform also supports building dApps.
• Darknode or those running a node on the blockchain earn financial incentives.
• Two types of fees – regular upfront fees paid out to compensate Darknodes for incurred computational costs. The second is an optional incentivization fee to promote Darknodes to prioritize computation. Running a Darknode requires owning and holding 100,000 REN.

Pros:

• Transparency because of atomic swaps.
• Decentralized trading reduces counterparty risks and the MPC protocol reduces Sybil attacks.
• Trading fees reduce significantly when paid using REN tokens.
• Anonymous trading.
• Tokens can be transferred to any blockchain. Traders can also access tokens from any blockchain using existing smart contracts without having to wrap or unwrap tokens.
• dApps do create a new business case.

Cons:

• Swapping blockchain could introduce a risk called compounding. In this case, the user risks blockchain challenges when swapping crypto on the blockchain.

Trading fees: 0.01% of the moved tokens. Traders can increase the fee in increments of 0.01% to encourage Darknodes to prioritize their transactions.

Website: Republic Protocol

Criticisms of Dark Pool Trading

• It is less transparent and may hence happen with little oversight. This way, they may be abused by traders and their owners. For instance, they may be affected by conflicts of interest and unethical investing practices.
• The majority of dark pool trades are carried out through a process known as internalization. The process involves the execution of pool trades within the pools even when the broker-dealer commands only a small market share.
• Trading against clients by the broker-dealer constitutes a dark pool malpractice. Broker-dealers can also favor high-frequency trading firms by selling special access to them. Other malpractices may include pinging. In this case, a high-frequency trading firm pings the system to internally discover large hidden orders. They will then engage in front-running or latency arbitrage.
• Dark pool operators may also exploit the system’s pool data and use it to infer placing trades against their customers. They may also use the data to misrepresent the pools when reporting it or advertising it to clients.
• Unfair advantages over other trading platforms especially due to the usage of high-frequency trading of large volume orders on these exchanges. Dark pools may fall under regulation, but these regulations are lax compared to those imposed on public exchanges. They are, this way, regulations are seen as providing undue advantages to dark pools over public exchanges. It may also encourage unethical investing practices and conflicts of interest.
• Lack of transparency, interest conflicts, predatory practices, massive lot sizes, lax regulation, and unfair practices may result in inaccurate prices.
• Market insights are accessible to dark pool traders while these insights may be inaccessible to regular retail traders. This happens in securities and crypto markets.
• Some issues raised regarding dark pools include flash orders which may give an informational advantage to some traders to trade ahead of the client.
• Poor post-trade transparency may also affect the market by making it difficult for investors to determine and compare the real liquidity of dark pools.

Frequently Asked Questions

Conclusion

This tutorial discusses what dark pool trading is, how it works, its advantages, and disadvantages, as well as platforms or websites, or apps on which it can be done whether you want to trade crypto or stock. We saw two major types of dark pool platforms and apps – decentralized and centralized.

The most important thing about dark pools is it allows institutions and large-volume traders to trade large blocks of shares and crypto without influencing the market prices because these orders are not made public until after the execution.

Dark pool trading, however, is fueled by the fact that these large volumes may not get the required liquidity on ordinary exchanges, plus they are done at low prices.

Decentralized dark pool trading tends to improve transparency and trades are done at much lesser fees than on centralized dar pools.

Research Process:

• Dark Pools Listed for Review: 30
• Dark Pools Shortlisted: 7
• Time Taken to Research and Write: 10 days