Dark pool
A trading venue that shows no quotes before a trade, so large orders can be matched without revealing them. It limits market impact, at the cost of uncertain execution and less transparency for the market.
Where you will meet it
Dark pool appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Contrast equity trading on an exchange, off an exchange and over the counter
“Off-exchange venues, such as alternative trading systems, dark pools and brokers matching orders internally, trade listed shares away from the exchange; dark pools hide orders before the trade so that large institutions can deal without moving the price against themselves.”
- Contrast trade implementation features across spot currency, OTC derivative, futures and options, fixed-income and equity markets
“Equities trade mainly on exchanges and alternative venues with visible order books, dark pools and algorithmic execution; liquidity is deep for large caps and patchy for small caps.”
- Explain what market fragmentation is and why it matters
“Fragmentation arises when the same security trades on many venues at once: exchanges, alternative trading systems, dark pools and dealer internalisation.”
- Explain the edge that low-latency traders hold over slower market participants
“For institutional investors, the consequence is that large visible orders may be detected and traded ahead of, so managers use algorithms that hide intentions, dark pools and randomised order sizes.”
See also
Practise it
Practise dark pool until it is automatic: questions that explain every wrong option.
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