Dark pool

A dark pool is a private trading venue where buy and sell orders match without being publicly displayed before they execute. It is a type of alternative trading system, distinguished from a public exchange by the fact that pending orders are not shown to the broader market the way they would be in a visible order book. Trades that happen inside a dark pool are still reported afterward as part of the consolidated tape, so the information becomes public, just not until after the trade is done.

Dark pools exist mainly to serve institutional investors moving large blocks of stock. A pension fund or asset manager trying to buy a million shares of a stock on a public exchange would risk showing its hand, other traders could see the large order sitting in the book and trade ahead of it, pushing the price up before the fund finishes buying. Executing that same order in a dark pool avoids tipping off the rest of the market, letting the large trade happen with less impact on the price the fund actually pays.

Dark pools have drawn regulatory scrutiny over the years because the lack of pre-trade transparency raises questions about fairness and about how prices are actually being formed. A meaningful share of total US stock trading now happens in dark pools and other off-exchange venues rather than on public exchanges. For an individual investor, the practical effect is usually invisible, a retail order might still get filled at or better than the publicly quoted price even though the specific venue and the other side of the trade were never shown beforehand.