Investments, tenth edition

  Dark Pools 

 Many large traders seek anonymity. They fear that if others see them executing a large buy 

or sell program, their intentions will become public and prices will move against them. 

Very large trades (called  blocks,  usually defined as a trade of more than 10,000 shares) 

traditionally were brought to “block houses,” brokerage firms specializing in matching 

block buyers and sellers. Part of the expertise of block brokers is in identifying trad-

ers who might be interested in a large purchase or sale if given an offer. These brokers 

 discreetly arrange large trades out of the public eye, and so avoid moving prices against 

their clients. 

 Block trading today has been displaced to a great extent by  dark pools,  trading systems 

in which participants can buy or sell large blocks of securities without showing their hand. 

Not only are buyers and sellers in dark pools hidden from the public, but even trades may 

not be reported, or if they are reported, they may be lumped with other trades to obscure 

information about particular participants. 

 Dark pools are somewhat controversial because they contribute to the fragmentation 

of markets. When many orders are removed from the consolidated limit order book, there 

are fewer orders left to absorb fluctuations in demand for the security, and the public price 

may no longer be “fair” in the sense that it reflects all the potentially available information 

about security demand. 

 Another approach to dealing with large trades is to split them into many small trades, 

each of which can be executed on electronic markets, attempting to hide the fact that the 

total number of shares ultimately to be bought or sold is large. This trend has led to rapid 

decline in average trade size, which today is less than 300 shares.