Dark pools

Trading in the dark

So-called 'dark' trading has always been part of the market, especially when managing larger trades. However, technology and the increase in this activity have made it easier for trades to be done off public markets. This may be affecting the price you're paying for shares.

Here we explain more about dark pools and the benefits and drawbacks.

What are dark pools?

A 'dark pool' is a system that enables assets such as shares to be traded away from public exchanges such as the Australian Securities Exchange (ASX) and Chi-X.

Dark pools were originally created to allow traders to anonymously execute large-scale share transactions that would normally cause big price movements on public markets, like the ASX. These are known as 'block trades'. 

Trades done 'in the dark' are hidden from the public and other brokers before and during the trade. The details of the trade are reported once it is complete. 

Many brokers operate dark pools to automatically match two client orders or to match a client's order with their own inventory. This may result in a better price than is available on an exchange market. A faster trade may also be possible. 

This is called 'internalisation'. If your buy or sell order is placed this way, your broker may make money on the 'spread' - which is the difference between the purchase price and the sale price of the share. 

With dark pools, brokers may also pay a lower fee to the market operator than if the trade was completed on the public market. This benefit may not be passed on to the client.

Drawbacks of dark pools and dark trading

Dark pools attract trades away from public markets so they are not accessible to all investors. 

Dark trading can widen the difference between the purchase price and the sale price on a public market. This can lead to poorer outcomes for both buyers and sellers.

Trades that are completed in the dark can also jump the queue of orders on a public market. This increases the risk that prices may move before investors with orders on the public market have traded. 

Dark pools, and dark trading more generally, can lead to a lack of transparency in the market. 

ASIC is currently considering how dark pool operators should be regulated to ensure the practice does not have a negative impact on investors using public markets. For more information, see ASIC's media release about new market integrity rules.

Avoiding dark pools

If you have concerns about your broker using dark pools or internalising your trades you can request that they only execute them on public markets. However, they may not agree to this. 

You should ask your broker whether they are using dark pools to execute your trades and decide whether it is right for you. 

Related links

Last updated: 18 Aug 2015