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dark pool

noun [countable]

a method of financial trading in which share prices are hidden and not openly available to the public

'A recent batch of enforcement actions against dark pools run by big global banks, coupled with incoming rules in Europe that aim to make markets more transparent by putting a cap on dark-pool trading, has alerted investors to the risks of trading in the murkier areas of the market.'

Reuters UK 13th July 2014

Imagine a situation in which you agree to buy something but the amount you're paying is concealed, with neither you, the retailer, nor any passing customer being able to read the price tag? It sounds completely bizarre, but this is effectively the scenario which is at work in a trading formula known in the financial world as a dark pool.

in Europe, new directives are being introduced which aim to make markets more transparent by putting a cap on dark-pool trading

A dark pool, sometimes, though less frequently, described as a black pool or upstairs market, is a trading network in which the share price initially offered is invisible, so that even participants do not know the precise details. The price at which shares have changed hands is then only revealed later, after the trading is done.

Put so simplistically, it seems difficult to see the point of this, but in the world of the stock markets, a dark pool has a number of benefits, allowing traders to buy or sell large orders without running the risk that other traders will work out what's going on and therefore raise or lower prices, or take advantage in some other way. In short, the total lack of transparency in the trading process minimizes information leakage and impact on the market by other, perhaps undesired, participants. The majority of dark pools are trading exchanges offered separately from public exchanges like the New York Stock Exchange and NASDAQ, thereby remaining confidential and outside the radar of the general investing public.

The expression dark pool hit the spotlight in June 2014, when British bank Barclays was sued by financial regulators in New York for luring institutions into using its private trading venue (aka dark pool). The move has put the concept under much greater scrutiny, increasing pressure on other global banks involved in dark-pool trading, such as Credit Suisse and the Bank of America, to provide more information to investors on how they operate. In Europe, new directives are being introduced which aim to make markets more transparent by putting a cap on dark-pool trading.

Background – dark pool

As well as being a countable noun compound, the expression dark pool frequently occurs in hyphenated form as a modifier with collocates such as trading, exchange, etc.

The term is inspired by likening the concealing of financial transactions from public view to the way that murky, dark water hides whatever lies below its surface. The same metaphor extends to related concepts, such as the description of financial markets as waters, which can be safe to dive into, influenced by ripples of activity, or potentially inhabited by predators (competing investors).

The financial lexicon has long had a penchant for metaphor, as illustrated in meteorological references like the words storm or turbulent in the description of economic markets. More recently, we've experienced the poisonous impact of toxic loans, seen debt problems alleviated by haircuts (a reduction in the value of a borrower's debt), watched the flow of new money stemmed by a taper, and witnessed anxiety about the precarious situation of a fiscal cliff.

by Kerry Maxwell, author of Brave New Words

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This article was first published on 29th July 2014.

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