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
Here we explain more about dark pools and the benefits and
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
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
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
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
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
You should ask your broker whether they are
using dark pools to execute your trades and decide whether it is
right for you.
Last updated: 18 Aug 2015