Dark pool, if explained in simple terms, can be attributed to the markets of over-the-counter trade. The name may suggest that Dark Pool is some kind of underground trade that has no regulators. But this is not the case. The major users of such markets are large investors. Wishing to buy or sell large volumes of an asset without affecting its exchange rate.
We can take for example Coca-Cola. Berkshire Hathaway has a 9.3% stake, which is $23.5 billion. If Warren Buffett decides to sell half of the company’s securities using a regular stock exchange, then releasing such a number of shares into the market will cause their value to drop immediately. All this will happen because other investors and traders will immediately join such an impressive short-term position. The only way not to provoke such a situation is Dark Pool. If you sell Coca-Cola shares on the over-the-counter market, at a stock price, it doesn’t have a big impact on their value, and it’s also within the law.
Dark Pool is an over-the-counter trade. It originally appeared on the stock market and then covered the rest. Dark Pool has the main task of providing an average price for an asset between BID (purchase price) and ASK (sale price), for residents of the pool, without revealing the amount and volume of the transaction.
On Dark Pool and other over-the-counter markets, trading volumes are 40%. How does Dark Pool work? Take an example.
There is a certain market member who has 10,000 BTC and a desire to sell them. If he goes with his desire to a simple exchange and decides to sell everything in one lot, then, with a greater probability, there will be an impact on the market and the bitcoin exchange rate will begin to fall. In addition, there is a problem for those who like to stay in the shadows. When a transaction takes place on a regulated exchange, there can be no anonymity. Of course, do not forget about the high volatility of digital currencies, he will not be able to get a fixed price for several lots. This is where Dark Pool comes into play. We still have a member with a desire to sell their 10,000 BTC, there is a second one who wants to get them. The average price between BID and ASK is set, and if both participants are satisfied with the terms of the transaction, an exchange will take place. Due to the fact that the information about the transaction will not get into the ECN (US register), where all data on completed transactions of purchase/sale of assets fall, there will be no impact on the market, the data will not be disclosed and the market price of BTC will not be affected.
Dark Pool is interesting to institutional investors, as it allows them to hide their intentions from third-party major market participants. Exchanges, whether cryptocurrency or traditional, are also interested in Dark Pool, as this will allow them to save on commissions for all payment transactions.
Types of Dark Pool
- Dark Pool of specialized organizations.
This type of Dark Pool typically works with billionaires or large investment funds. The managers of such organizations are engaged in creating a high-quality Dark Pool so that it can function for any broker and can provide a comprehensive service for the client.
- Intra-Exchange Dark Pool
It is a special channel created for transactions among major traders of the exchange. One of the advantages is full anonymity of residents. Access to this channel is usually given for the purchase of a VIP subscription.
- Dark Pool of brokerage organizations
There is no big difference with the intra-exchange Dark Pool, since the principle of operation is the same. Access to them can be obtained individually, also when purchasing a VIP package of services.
You need to pay attention to P2P exchange services. This is a separate direction, especially in the crypto market. They are of two types – as a separate type of service on the cryptocurrency exchange, and a separate platform. Over-the-counter trading of two market participants (peer-to-peer) takes place on such platforms. The volumes of such transactions can be completely different, and at the same time they do not affect the exchange rate.
What is the impact on the market
Dark Pool has spread quite widely in all traditional markets, but not in cryptocurrency, although it is gaining momentum. Because regulators are trying to make markets more transparent, large residents prefer Dark Pool because they do not show liquidity or indicate the depth of the market.
Traditional exchanges also have an analog of Dark Pool, it is called Iceberg-order. The essence of the Iceberg order is to split a large lot into small ones. At the beginning of the order stack are the first ” fractions”, when the desired price is reached, the order is executed, and the rest go to the end. The remaining orders are executed according to the same scenario.
But the Iceberg-order has two disadvantages:
- Execution does not always take place at the best market price.
- Using an Iceberg order, you can forget about privacy.
The main dissatisfaction with regulators in the Dark Pool is that there is a lack of transparency in trading. On asset pricing, as you may have already understood, Dark Pool does not have any impressive impact, thanks to the same anonymity of activity. Simple traders do not lose anything due to the existence of the Dark Pool, due to the fact that their strategy is based on the transparent operation of the exchange. It is also worth understanding that Dark Pool participants are not immune to risks, due to the fact that the organizers may leak information about the upcoming deal. If this happens and the transaction data is made public, it will certainly affect the price of the asset and it will change, however, as well as the plans of the participant himself.
There is also another opinion about Dark Pool, it comes from the SEC (US Securities and Exchange Commission). The agency believes that Dark Pool can leave the United States without an open auction, since if there are fewer investors on the exchange, then pricing will become worse, due to the lack of supply and demand.
Dark pool is already densely settled in traditional markets and very soon will also take its place in the crypto world. It is mainly suited to large investors who wish to sell or buy a sizable amount of the crypto of an asset without shaking its price in the market to gain more profit.