Dark liquidity pools help institutions execute large transactions and avoid making an impact in the public markets. By definition, dark pools don’t offer buy or sell quotes. Broker-dealers, exchanges, and other third party advisors use dark pools to pair or cross institutional orders. In some situations, a firm’s proprietary desk may match transactions with the firm’s customer orders in a dark pool. Unlike the public markets, buyers and sellers aren’t required to reveal their identities within the dark pool.
Financial advisors to institutions say that customers like executing in dark pools because there’s usually a lower cost to do so (than in the public markets). Goldman Sachs, Citi, and CS offer dark pool routes to customers.
According to Chairman Mary Schapiro of the SEC, “The continuing growth of trading in dark pools and other types of dark venues” challenges the ability of the public market’s pricing transparency function. Though the Dodd-Frank Act didn’t call out dark pools, Chairman Schapiro says the SEC plans to focus upon high frequency trading and dark pools in 2011.
It’s likely that the SEC will allow some pools to operate. With about 40 dark pools operating in Q2 2011, it’s also likely that the number of sanctioned dark pools will decrease over time. Buy-side managers express concern that some traders unfairly benefit from the opaque murkiness of dark pools.