Dark Pools

A form of stock market manipulation?



Dark pools refer to trading platforms created from institutional orders, which are unavailable to the public.

Otherwise known as 'dark-pool liquidity', the bulk of the trading is represented by block trades undertaken away from central exchanges.

While this form of trading does not directly affect value investing, it can potentially affect price discovery, the ability of the stock market to quickly provide the current price of a stock.

This form of trading is referred to as such because details of these trades are concealed from the public, making the transactions difficult to detect.

Traders turn to 'upstairs trading' instead of public markets such as the New York Stock Exchange to avoid revealing their identities and providing clues about their intentions.

If the public market became aware of a large trade, then the market price of the stock in question could move in a direction unfavorable to the trader in the large parcel of stock and hence make it difficult or more costly to finalize the trade.

Limiting this form of trading would be a positive for public stock exchanges as they miss out on commissions on this type of trading.

The US Securities and Exchange Commission (SEC) is looking at lowering the amount of daily volume in a company's stock that can be traded on the dark-pool networks before prices must be made public.

For the value investing public, any action that leads to faster and more transparent price discovery for a stock is to be commended.


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