What are Dark Pools? (In 5 Minutes) - YouTube

Today I am going to talk about Dark Pools. What  are they? Why were they created? And What are  

the concerns that people have about them? I’m  addressing each one of these in this video. So,  

let’s get started! First What are Dark Pools?  Well dark pools are a type of Alternative  

Trading System, also known as ATS. They are where  institutions, hedge funds, banks, public pension  

funds, and more can accomplish their large trades  in blocks. Dark Pools are used to hide their  

trades, also their intentions, from the public  exchanges, such as the New York Stock Exchange  

and the NASDAQ. They are an alternate way to route  their orders as well. Dark pools also do not have  

a level 2 or order book visible to the public. A  fun way to explain them is let’s say you want to  

buy 1 million shares of a stock. You want to do it  in the dark pool. So, you go to this pitch-black  

trading room. You can’t see who anyone is,  how much they are selling their block for,  

they don’t know who you are, or even how much you  are willing to pay in general. All you do is you  

just keep on bidding until you match the price  that the other party is looking for. After that  

match, you both leave the pitch-black trading room  and then up to 3 hours later, the trade shows up  

on the consolidated tape. And here is something  that I heard from Stefanie Kammerman when she  

was talking to Charles Payne. She mentioned that  if institutions cross trades from the London desk  

to New York desk, they don’t have to report  their trade for 24 hours. Apparently, this is  

a loophole and a huge advantage for them as well. Next: Why were Dark Pools Created? Well let’s say  

you run a large public pension fund and you have  a large block of shares of a stock. Well, you  

are probably watched very, very closely because  if you sell a bunch of shares, people may think  

that you have some upper hand knowledge that they  don’t know about. So, you are in a way seen as an  

indicator to investors that also hold that same  stock as well. So, let’s say that you want to sell 1  

million shares of a stock and you do it on the  New York Stock Exchange. If you did it there,  

people would start to take notice when they see  walls of 10,000 or 100,000 shares showing up on  

the level 2s. This could hurt your goal because  the market would react, other people may start  

selling too. Also, the price you get for the first  10,000 would be let’s say $10. The next 10,000  

would be $9.95,the next 10,000 would be $9.90 etc. This  technical pressure pushes down the price as buyers  

at each price point get their fill, causing  buyers at lower price levels to eventually  

get some of the action. By the end of it, let’s  say you sold all 1 million shares for an average  

price of $9.50 on the public exchange. But if  you sold all 1 million shares on the dark pool,  

with the same starting price at $10, you could  sell all your shares in 10,000 shares or more  

blocks for let’s say $9.90-$10 range over time.  Then A) you would save more money as the average  

is higher than what you’d get on public exchange  AND B) No one would know who you are until you  

report it a couple of hours later if you are  let’s say a public pension fund as well. And,  

at that point the other party would also report  their trade. Maybe the market will react to this,  

but maybe not. BUT you know you have your money  out, so you’re not concerned about the reaction.  

So, with that example in mind, you can see that  dark pools were created to avoid impacting markets  

with huge block orders, which could cause  a large amount of volatility on public exchanges. 

Next: What are the concerns that people have  about Dark Pools? Well first it’s in the name.  

Dark Pools are “dark” because of their lack of  transparency. They are away from the public eye.  

This is great for the big players but may  leave retail investors at a big disadvantage.  

This disadvantage is amplified if both parties  in the dark pool are private, as neither one of  

them needs to report. This is important as these  non-reporting, private institutions can hide their  

intentions, strategies, and plans. Lastly, it  also can be seen that dark pools are taking up  

activity potential away-from the New York Stock  Exchange, Nasdaq, and other exchanges. This  

potential is even quantifiable as we currently  have 58 different Alternate Trading Systems out  

there compared to the only 24 National Securities  exchanges. On top of this in May 2019, the Wall  

Street Journal reported that the percentage “of  U.S. stock trades executed on dark pools and other  

off-exchange trading venues rose to 38.6%”.  That’s a lot of potential taken away from the  

other exchanges. So, if have any questions about  dark pools, or want me to go into more detail about  

anything else, please comment down below! I really  want to hear what you think! Also, if you want me  

to dive deep into any other subjects or topics,  please let me know as well! Thanks for watching!