What is a dark pool?

A dark pool is a special place that facilitates the trading of financial instruments. A dark pool differs from a public trading platform in that there is no visible order list, and trades are not visible to the public (or only become visible once they are actually executed).

Liquidity in dark pool markets is called dark pool liquidity. The majority of dark pool trading is done in the form of bulk trades. Wholesale trading is the trading of a large amount of assets at a pre-determined price.

Dark pools first appeared in the 1980s and were used mostly by institutional investors who trade large numbers of securities.

The use of dark pools allows institutions to place orders and place trades without publicly revealing their intentions first. This is a useful trait, as her intentions to buy or sell large amounts of assets can have a detrimental impact on her trades before she has a chance to execute them.

Dark pools have grown to become a significant part of global stock markets, and this article will examine their potential impact on the cryptocurrency space.


What are the advantages of using a dark wrapper?

  • Limited influence on market trends – Traders who want to trade in large volumes can hide their intentions from the wider investing public.

  • Price Optimization – Trades are often matched based on the average of the best available bid and ask price. In such cases, both the buyer and seller get a more favorable trade than they could in the open market (the buyer gets a buy transaction at a low price, and the seller gets a sell transaction at a high price).

  • No Slippage – Since most dark pool trades are done as bulk trades at pre-determined prices, traders can be sure that they will be able to execute their entire trade at the desired price.

 

What are the controversies about dark complexes?

  • Conflict of interest – Since the order list is not visible, there is no guarantee that the trade was executed at the best possible price. If the institution facilitating the trading has a conflict of interest, it has the ability to hide true market prices.

  • Detrimental impact on market prices – If the majority of trading occurs in dark pools, prices on public trading platforms may not reflect the actual market. Much of investing and trading relies on the free flow of information, and dark pools hinder this availability.

  • Weakness in front ofHigh Frequency Traders (HFTs) – Dark pools can be an ideal arena for predatory practices by high frequency traders. If they have privileged access to order list data, they can trade on inside information for large orders and take advantage of unsuspecting traders.
    Dark pools also allow another method called "testing", which involves sending a large number of small requests to plan a large hidden request. They are used to evaluate areas of liquidity in the order list and give high frequency traders an advantage that could be considered detrimental to the market.

  • Smaller Average Trading Volume – Since their emergence in the 1980s, the average trading volume of dark pools has declined significantly. This indicates that financial institutions that trade with high volumes are not using dark pools anymore. This makes its presence less urgent and potentially hurts the broader market. This may result in a better market if smaller orders are executed on trading platforms with an order list visible to the public.


Decentralized dark pools

Similar to dark pools in traditional stock markets, dark pools for cryptocurrency trading are available on some trading platforms.

Compared to regular dark pools, decentralized dark pools can have the advantage of more secure digital verification methods. Decentralized dark pool protocols can maintain a fair market price for all participants without the possibility of price manipulation.

In trades involving multiple blockchains, cross-chain currency swaps can be used to facilitate trades without the need for an intermediary.

Decentralized dark pools can also use other new cryptographic techniques such as zero-knowledge proofs to verify the integrity of dark pool transactions.

Dark pools can also be useful in illiquid cryptocurrency markets, as they allow traders to execute larger trades without any slippage. While a large order can have a significant impact on an illiquid market, the same trade can be executed in a dark pool without slippage.

Due to the lack of institutional traders in the cryptocurrency space, dark pools have had a minimal impact on the cryptocurrency markets, but this may change in the future.


Concluding thoughts

Due to their complete lack of transparency, dark pools have been the subject of controversy since their inception. Also, hiding the majority of trading volume is not a desirable trait when it comes to any market.

With recent developments in cryptographic verification methods, the process of using dark pools could become more secure. Open source protocols can be built in a way that verifiably maintains the same rules for every participant, reducing the risks of using a dark pool.