Dark pools are basically networks of privately held exchanges, markets and trading forums through which a platform is provided for the anonymous trading of securities. This is a platform for practicing trade between the brokers or dealers and institutional investors who want to place orders for the trade of specific securities avoiding the prying eyes of brokers and public scrutiny. The main purpose of this is to enable buying and selling of a large amount of stocks without the market getting affected and as a result of which they have a chance of getting better execution prices. One can seek help from platforms like FinCrowd App which can help in investing in dark pools in the most effective manner.
The most important reason for dark pools to come into existence was the limited market impact. It claims to significantly protect the impact of large orders on a market. The institutional investors and traders have to constantly contend with the dynamic nature of the market while selling or buying a large block of shares. As a result of which they receive comparatively lower prices than their expectation for sale transactions and also end up paying more than what they would prefer for purchase transactions.
The complete transparency feature of the public market is not very beneficial for large investors as their trading intentions become visible to everyone. But in the case of dark pools, these cannot be accessed by the public and these are absolutely opaque in nature. Hence, large block trades can be kept private without revealing the details such as trade size, parties involved or the price of the execution. Consequently, execution of trades in dark pools will have a limited market impact in comparison to the other similar trades which are executed on public exchanges.
Dark Pools offer potentially better prices. Typically, participants of dark pools are large players and thus, the pool operator can match the big orders at favorable prices in comparison to the public exchanges. Say, for example, crossing orders at the midpoint of the ask prices and the best bid can result in better price fetched by both the seller and the buyer.
There are no exchange fees for the trades which are executed on dark pools. So it is very cost effective that can contribute to significant savings of cost over a period of time. Costs associated with the spread are also reduced by orders crossing at the midpoint of the bid-ask spread.