Dark Pools Trading

Dark Pools Trading: Statistics and Strategies

There’s more than meets the eye in the financial markets, and there are meetings and markets where securities are being exchanged away from the public eye. The concept of dark pools trading is one of those.

But sadly, it’s rarely found in the retail trader’s dictionary. You may have questions like “what is a dark pool?” or “how is it affecting me?”

Read on. Your answers to dark pools trading are here.

What Are Dark Pools?

Dark pools are trading systems that allow institutional traders to trade securities without going through public exchanges. It is a market, like every other stock exchange, where securities are traded, only that it is private.

“Why would institutional traders need dark pools to make their trades?” you may ask. The simple answer is that institutional traders often make sizable trades at once, enough to cause considerable commotion in the market if the public knew about them. So, the dark pool is a place where they can hide their trades without affecting the stock market.

Dark Pool Trading Statistics

Insight into Dark Pools

Dark pool trading refers to the private trading of securities outside of public exchanges, where buyers and sellers can trade anonymously. According to 1, in December 2022, dark pools accounted for 13.75% of the US equity volume in the United States, and 7.50% of the total value traded in European markets. Dark pools have grown in popularity in recent years, with almost half of trading activity happening off traditional exchanges in February 20222. The average trade size in dark pools has declined to less than 150 shares3. Dark pools are a popular choice for institutional investors due to their ability to execute large trades without moving the market5. Popular strategies used in dark pool trading include liquidity provision and statistical arbitrage5. However, accessing dark pool data can be tricky and expensive2. Dark pool operators have also been accused of misusing their data to trade against their clients3.

History of Dark Pools

Although Institutional traders have been in the game for a long time, dark pools were just introduced in the 1980s as a way for these investors to trade securities without disrupting the public markets. By trading in these private forums, these investors could execute large trades without tipping off other market participants and driving up the price of the securities they were buying or selling. This allowed them to execute their trades more efficiently and at a better price.

Over time, dark pools have grown in popularity and are now used by many institutional investors to trade various types of securities, including stocks, bonds, and derivatives. Despite their popularity, dark pools remain somewhat shrouded in mystery, as the details of the trades that take place on these exchanges are not publicly disclosed.

Regulation of Dark Pools

The regulations governing dark pools vary depending on the jurisdiction in which they operate. In the United States, for example, dark pools are subject to the exact regulatory requirements as traditional stock exchanges, such as the requirement to register with the Securities and Exchange Commission (SEC) and to disclose certain information about their operations.

In addition to these general regulatory requirements, dark pools are subject to specific rules designed to promote fairness and transparency in the trading process. For example, dark pools must disclose the percentage of their trades executed at the midpoint of the national best bid and offer, which is a measure of the liquidity and competitiveness of the market.

Critiques of Dark Pools

Despite tons of security measures that are set in place, dark pools have been the subject of criticism from several quarters. One of the main criticisms of dark pools is that they can be used to manipulate the market by providing a venue for large investors to trade without the knowledge of the broader market. This can lead to a lack of transparency and fairness in the market.

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Backtested trading strategies

Another criticism of dark pools is that they can be used to engage in predatory trading practices, such as “front running” (where a trader uses knowledge of a pending trade to profit from it before it is executed) and “spoofing” (where a trader places a large number of fake orders to manipulate the market).

How Do Dark Pools Work?

Dark pools work pretty much the same way public stock exchanges work. Buyers and sellers converge to trade securities. Only that the participants are “big money” establishments, and the orders are kept private.

And thanks to this privacy, whatever happens in the dark pool doesn’t spook the general stock market.

Another benefit of dark pool trading for its users is that buyers are often ready to match sellers, despite the humongous sizes of blocks being traded. For instance, if a block sell orders were to appear on the public stock exchange, there wouldn’t be many buyers available who’re willing to match that order since the public stock exchange is mainly filled with retail traders and investors.

Dark Pools and High-Frequency Trading

Dark pools and high-frequency trading often go hand in hand. By the way, high-frequency trading is a trading strategy where computers are deployed to make many trades in a short period with the hope of profiting from little price movements.

This kind of trading generates a lot of profit for the institutional traders, so much so that more and more of them started coming on board. These HFT trades began getting so many that the law of demand and supply kicked in; price grew with demand.

As stock prices grew, it became harder for everyday retail traders to buy securities and trade. Then these HFT traders decided to conduct their businesses elsewhere, where retail traders would be unaffected, and they were less likely to drive prices up. The dark pool was perfect for this purpose.

And that is the relationship between dark pools and HFT.

Dark Pool Trading Strategies (dark pool strategy backtest)

Insight into Dark Pools

There are several different strategies that traders use in dark pools. One such strategy is “iceberg” orders, where only a small portion of the total order is displayed on the open market. This allows traders to execute large orders without tipping off other market participants about their intentions.

Another strategy often used in dark pools is “momentum ignition.” This involves using small trades to test the market and gauge investor interest before executing a larger trade. This can be an effective way to build momentum and drive up the price of a security.

Can any dark pool strategy be backtested if they are so “secret”?

You can probably backtest dark pool strategies by using one of the dark pool indicators mentioned in the headline about dark pool indicators. Unfortunately, we don’t have access to any dark pool data and thus we are not able to perform any backtests.

Why Use a Dark Pool?

Now that you know how dark pools work, you might want to know their roles and why banks and other “big boys” are using them.

Facilitates Block Trading

Institutional investors use dark Pools to get their orders filled without impacting the public market.

Price improvement

Institutional traders’ primary reason for using the dark pool is to get a reasonable price for their order execution. One of the ways is by demanding market improvement and getting a mid-point of the bid and ask price.

Advantages of Dark Pools

The big boys will never throw their money (especially in huge chunks) into what wouldn’t be an advantage. It turns out that dark pools don’t just benefit the institutional traders; they help us as retail traders too.

Here are some of the ways dark pools are advantageous to traders.

Dark pools offer privacy

By using the dark pool, Institutional investors keep their trades private. This helps to keep market prices on the public market intact.

Dark pools offer market stability

The participants of dark pool trading often have millions’ worth of block orders to fill. Orders that, if publicly quoted on stock exchanges, could spook the entire stock market, and the public can start panicking. But thanks to the dark pools, these market-shaking trades are made elsewhere.

Dark pols give better prices

The dark pool is a meeting point for large institutional traders who understand their everyday needs for discounted prices. As a result, most orders by participants are matched by the operator at a price that is better when compared to public prices.

The buyers and the sellers can fill their orders at the midpoint of the bid and ask price. This way, they both get even better prices.

Dark pools lower costs

Trading costs accumulate fast! Even more when you’re considering larger orders. Unlike the public market, where you are required to pay the bid or the ask price while executing your orders, the dark pool allows your orders to cross at the midpoint of the bid-ask spread, saving a lot of money down the line.

Disadvantages of Dark Pools

Although dark pools provide investors and retail traders with some advantages, they are not without mind-numbing disadvantages, too. Here are some of them:

Lack of Transparency

The very thing that makes dark pools unique is their most significant disadvantage, at least from a retail trader’s perspective. Because all the activities of the dark pool are kept in the dark, no one knows what goes on there, which is bad.


The participants of dark pools are institutional traders who are large enough to be privy to inside gossip from companies. Information that the rest of the public doesn’t know yet, or will never even know. This gives dark pool traders an “unfair” advantage over retail traders because they can know what’s likely to happen to security before the rest of the world and double down on it to their advantage.

Dark pool abuses

It’s easy to abuse the lack of transparency that the dark pool provides. Pool operators have been caught trading against the pool client’s position many times.

The Securities and Exchange Commission (SEC) has fined some banks for charges like front-running and a couple more.

Types of Dark Pools

As of this writing (December 2022), there are close to 70 dark pools registered with the Securities and Exchange Commission (SEC). Over half of them are in New York.

All of these dark pools fall into three major categories, depending on who runs them:

Exchange-Owned Dark Pools

Some examples of exchange-owned dark pools are ASX Centre Point, BATS Trading, International Securities Exchange, and NYSE Euronext.

Broker-Dealer-Owned Dark Pool

Broker-dealer-owned dark pools make up the largest share of the dark pool types.

Independent Dark Pools

These pools are different because they are run by individual companies that often reduce costs and fees that otherwise would be high due to low liquidity.

Examples of Dark Pools

There are many dark pools across the world but here are some popular examples:

Goldman Sachs’ Sigma X

This dark pool is operated by the investment bank Goldman Sachs. It is one of the largest dark pools in the world and allows institutional investors to trade a wide range of securities.

Citadel Securities

This dark pool is operated by the financial services firm Citadel. It offers a variety of services to institutional investors, including dark pool trading.

Barclays LX

This dark pool is operated by the global bank Barclays. It offers a range of services to institutional investors, including dark pool trading.

How Does Dark Pool Affect Stock Prices?

Many investors think that dark pools significantly affect the stock market. This assertion is often based on the fact that institutional traders and investors use dark pools to execute their orders. However, this is not precisely the case.

Large orders placed by institutional traders affect the supply and demand of assets. However, the impact is not readily visible as other investors in the public market are not likely to see it. Most institutional traders scale into their positions in smaller blocks which further mask their activities and lower the impact on the stock market.

We can go back and forth talking about whether or not the stock market is affected by whatever happens over at the dark pool, but in reality, we can not precisely tell how it affects the stock market because each trade is unique.

Given that the dark pool was primarily created to prevent large orders by institutional traders from affecting the public market, you can be sure it affects it significantly less than the media would want to paint it.

How Do You Spot a Dark Pool Trade?

The dark pool is the playground of the big boys (institutional traders). It is common for retail traders to want to know what goes on on this playground, and they look for ways to spot dark pool activities.

Unfortunately, there aren’t any known ways to peep at what’s happening in dark pools unless you’re a part of one. I supposed it’s called the dark pool for a reason.

However, you can at least follow what dark pool providers do through dark pool indices, which can hint at what will likely happen in the public market, like stocks.

Another way you can get in on what’s happening with the big boys is to have an ear for news. Institutional traders are generally required to disclose all their trades, even if it’s a while after they’ve taken action, and journalists can’t have enough of them!

You can take advantage of this by setting a Google alert for significant mutual funds to be the first to know their movements. This can be slow, but it’s guaranteed to put you ahead of most retail traders. And who knows, you can increase your win rate down the line.

Dark pools trading volume

As mentioned, dark pools trading volume can be high, but it varies from stock to stock. The webpage Trendspider made some interesting charts to show the difference in dark pool trading volume. Here are two examples:

Dark pools trading strategy

The dotted line indicates 50%, and thus the first stock has 50% of the volume in dark pools, and the lower one has almost nothing.

List of trading strategies

We have written more than 800 articles since this blog’s inception as long back as 2012. Plenty of those articles contain backtested strategies (with specific trading rules), and we have compiled many of those into a package of code that you can order. We have thus far over 160 different strategies in the compilation.

The strategies are taken from our trading strategy list. The strategies are an excellent resource to help you get some trading ideas.

The strategies also come with logic in plain English (plain English is for Python traders).

For a list of the strategies we have made please click on the green banner:

These strategies must not be misunderstood for the premium strategies that we charge a fee for:

Is There A Dark Pool Indicator?

The lack of transparency in the dark pool can make it difficult for investors to gauge the market’s direction and make informed trading decisions.

That said, there are a few hints that can be used as indicators, for example, Squeezemetrics’ The Dark Index (DIX) and the Gamma Exposure Index (GEX). They can be used to gauge market sentiment.

However, there are several indicators that can provide some insight into the activity taking place within dark pools. Here are a few of the dark pool indicators:

Dark pool volume

This is the total amount of shares that have been traded in a dark pool during a given period of time. This can be a useful indicator of the level of activity within a dark pool and can help you gauge the level of liquidity in the market.

Dark pool participation rate

This is the percentage of total trading volume within a dark pool. A high participation rate may indicate that there is a significant amount of trading activity taking place in the dark pool, which could be a sign of strong investor interest in a particular security.

Dark pool imbalance

This is the difference between the number of buy and sell orders within a dark pool. A large imbalance in favor of buy orders, for example, could signify strong demand for a particular security and that its price is likely to rise.

Dark pool print volume

This is the total number of shares traded within a dark pool in a single print (i.e., transaction). A high print volume can indicate that there is a large amount of trading activity taking place within a dark pool, which could be a sign of strong investor interest in a particular security.

Dark pool print rate

This is the percentage of the total trading volume within a dark pool in a single print. A high print rate may indicate that there is a significant amount of activity taking place within a dark pool, which could be a sign of strong investor interest in a particular security.

Overall, dark pool indicators can provide valuable insight into the level of activity and investor interest in a particular security. By tracking these indicators, investors can better understand the market’s direction and make more informed trading decisions.

Are Dark Pools Bad For The Average Retail Trader?

If you’re on this page reading about dark pools, chances are that you’re a retail trader. So naturally, you would be concerned about the effects of dark pools on the average retail trader like you and me.

By design, dark pools were created so that the trading activities of institutional traders that may affect retail traders are taken elsewhere. So, the immediately obvious answer is that dark pools are not bad for the average retail trader.

However, this is not to say that dark pool creators had the best interest of retail traders at heart when they were creating their establishments. We’ll never truly know. But we believe you shouldn’t sweat the small stuff about how a dark pool affects you. Concentrate on the things you can affect instead.

Frequently Asked Questions About Dark Pools

If you are just learning about dark pools, you might have some questions you haven’t found answers to. Here are answers to some of those questions:

How many dark pools are there in the U.S.?

It is difficult to say precisely how many dark pools are currently operating in the U.S., as the number may fluctuate over time. However, there are likely to be several dozen dark pools presently active in the country.

Are trades in the dark pool reported?

Yes, trades in dark pools are reported to the relevant regulatory authorities. These reports are typically made daily or weekly, and they provide information about the size, price, and other details of the trades that took place in the dark pool.

Do dark pool trades show on tape?

No, dark pool trades do not typically show on the consolidated tape. The consolidated tape is a system that provides real-time information about trades in the public markets, but it does not include information about trades that take place in dark pools.

What brokers use dark pools?

Many brokers offer access to dark pools as a way for traders to execute large trades without affecting the market price. Some examples of brokers that offer access to dark pools include Citadel Securities, Goldman Sachs, and Morgan Stanley.

Can retail traders use dark pools?

In most cases, dark pools are only accessible to institutional investors, such as large investment banks, hedge funds, and other financial institutions. Retail traders are typically not able to access dark pools directly. However, retail traders may be able to indirectly access dark pools through certain brokerage firms that provide access to these pools to their clients.

Where can you see dark pool trades?

A diligent search across the Internet will bring information about dark pools to your doorstep. You can easily track this news by setting Google alerts to popular mutual funds.

Can an individual trade on dark pools?

Although dark pools were created for institutional traders, an individual may be able to trade on dark pools if they have large enough orders to trade.

Are dark pools legal?

Yes. Dark pools are legal. Although it is often criticized for its lack of transparency, it is owned by reputable organizations worldwide.

Does crypto have dark pools?

Crypto has dark pools that behave similarly to other assets like stocks. They allow institutional traders to make transactions whose details are also hidden from the public.

Dark pools trading – bottom Line

Yes, dark pools exist. They allow institutional traders to take their trades to where retail traders are unaffected. Retail traders enjoy market stability. Institutional traders want low fees and privacy. Everyone goes home happy.

And if you only want to know how dark pools affect your trades as a retail trader, here’s a spoiler for you: not much.

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