Dark Pool Trading: An Introduction to ‘Invisible’ Exchanges

Table of Contents

dark pools

Dark pool trading allows for private exchanges out of the public stock exchanges (NYSE & NASDAQ). Ever since the mid-2000s, they have experienced a boom. They consistently account for around 30% of all trades, including those made on the exchange.

dark pool rising

source: Bloomberg

Despite its popularity, dark pool trading has gained a dubious reputation due to how brokerages and high-frequency trading (HFT) firms have allegedly abused the system. Many believe brokerages provide confidential information to predatory HFT firms, allowing the latter to trade in ways to unethically profit off of main street investors.

Michael Lewis, in his book Flash Boys: A Wall Street Revolt, chronicles how investment companies discover large hidden deals (‘pinging’ and leaked information), committing corporate crimes in order to rig the stock market through dark pools. If this truly happens, then many of us with a 401k or IRA could be getting ripped off by HFTs and brokerage firms.

We at the Zero Theft Movement, in our fight against the rigged layer of the economy, will explore dark pools and how they can be used to fix markets. Furthermore, we will see which brokerages and HFT firms may have colluded to unethically cross profit.

What is a Dark Pool?


A dark pool (a.k.a dark liquidity and black pool)  is a privately owned equity forum or exchange for trading securities, derivatives, and other financial instruments for exclusive investors who want to trade without exposing their intentions up until the trade has been completed and reported.

An alternative trading system (ATS), dark pools allow for block trading (large orders) without impacting the market, high trading prices, and exchange fees. These privately-owned equity forums conceal the particulars of trades, creating much room for financial fudging and predatory trading by high-frequency traders. 

The total absence of transparency, in effect, serves as dark pools’ appeal and often insidious uses. 

As a point of comparison, trades on NASDAQ or NYSE (a.k.a ‘lit pools’) occur in a completely transparent fashion, on a public forum. Public exchanges depend on centralized market prices, as opposed to the direct buyer-seller or ‘over-the-counter’ method of dark pool transactions. Investors also have to pay the typical fees associated with these exchanges. 

Thirty brokerage firms paid about $900 million to settle the civil suit contending they “schemed with one another for years to fix prices on the NASDAQ stock market,” the New York Times reported. They allegedly did so by not using odd-eighth NASDAQ quotes. See what the ZT community has uncovered about the matter.

Types of Dark Pools


As of Feb. 2020, more than 50 dark pools are operating in the United States, run mostly by investment banks.

Three major types of dark pools exist:

  • Independent/Electronic Market Makers

Run by independent companies, this type of dark pool provides low transaction and liquidity costs. This form of dark liquidity is not priced based on a centralized exchange. 

  • Broker-dealer owned

Large broker-dealers can establish their own dark pools, allowing trades amongst their clients as well as their own proprietary traders. They create prices based on order flow. 

  • Public exchange owned

Exchange-owned dark pools offer the infrastructure of exchange while preserving the investor’s anonymity. Prices, in this case, are wholly derived from centralized exchanges. 

The Emergence and Growth of Dark Pool Trading

Two major SEC-led events led to the emergence and growth of dark pools respectively. 

In the late 1970s, the SEC (Securities and Exchange Commission) was looking to increase competition among market makers. They decided to alter a financial regulation (19c-3), allowing stock listed on a given exchange to be traded off its exchange. 

While this rule change led to the emergence of dark pools throughout the 80s, this ATS consistently amounted to only 3-5% of the market. That is, up until the mid-2000s.

The SEC, in another effort to encourage competition and distribution in the marketplace, passed the Regulation National Market System (RegNMS). This new set of rules ensured that investors could gain better prices by trading free of the transparency of public exchanges. The dark pool market boomed, in part due to the transition to electronic trading, eventually reaching the share (~33%) displayed in the Bloomberg graph. 

Dark Pools and High-Frequency Trading

It’s important to realize that the introduction of the supercomputer significantly contributed to the dark pool boom. High-frequency trading (), when a machine executes trades based on complex algorithms in milliseconds, had started to take over the market.


In the U.S., ~50% of all stocks are traded by HFT.

Large HFT orders, due to sheer volume, could not be executed in single exchanges, leading to the trades getting executed in parts. Issues arose, however, as these partial exchanges altered predatory HFT firms of exchanges. It became a race between firms to see whose supercomputer could snatch up the inventory first, boosting share prices. Nowadays, firms have gone as far as using nitrogen coolers to ensure they can gain those extra milliseconds to beat their competition.  

Dark pools, due to their private nature, began to emerge, in part, as an attempt to escape the widespread use of HFTs. Ironically, the lack of transparency and regulation has made dark pools a gold mine for predatory HFT firms. The aforementioned Lewis mentions that Wall Street hires PhDs in fields such as quantum physics and electrical engineering to figure out how to best exploit dark pools.

This vulnerability to predatory trading accounts for much of the controversy surrounding dark pools. 

Poorly Kept Dark Pool Secrets: How Trading Abuses can Affect You

HFTs prove particularly insidious when utilized in dark liquidity. That opacity and lack of regulation, originally made to provide some protection against supercomputers, has made predatory traders all the more powerful and immune. 

Well-known banks on Wall Street create and run multiple dark pools, where they trade listed stocks from NASDAQ and NYSE between themselves. There is no way to learn about the transactions in real-time. The only information released comes once a week, from the banks’ regulator Finance Industry Regulatory Authority (FINRA). 

The public does not receive any information on who is buying and selling or the exact date and time of the transactions. For all we know, the same bank could execute massive stock buybacks, thus artificially manipulating their prices. The public prices, therefore, may not reliably reflect the actual value of stocks. Furthermore, when you have HFT involved, the sheer number of transactions makes regulation incredibly difficult. 

The government deemed the failing hedge fund Long-Term Capital Management (LTCM) ‘too big to fail.’ The Federal Reserve created a $3.65 billion loan fund to bail the company out. LTCM could survive the market volatility and liquidate in early 2000. But did the Fed truly have to bailout the hedge fund with taxpayer money? Or could global financial markets have rebounded without the intervention? 


Potential Cases of Dark Pools Being Used to Rig Stock Markets:

Dark liquidity started to receive attention from the media due to some of the controversies that got unfortunately attached with it. 

The complaints included the fudging of data relating to the number of high-frequency traders involved in the dark pool and the improper use of confidential customer information.

Here are some potential real-world cases of nefarious uses of dark pools:

The Barclays & Credit Suisse Settlements

In 2014, Credit Suisse and Barclays came under investigation by the SEC and the NY State Attorney General. The two companies settled for a combined total of $154.3 million.

A Reuters article states: “At the heart of the cases against both Barclays and Credit Suisse are allegations they misled investors in the dark pools, saying they would be protected from predatory high-frequency trading tactics.”

The report goes on to say, “In fact, Schneiderman’s [former attorney general of NY] office said, the program was riddled with “exceptions” that favored high-speed traders. [Barclays] also disseminated trading analysis materials to investors that intentionally deleted its largest and most aggressive trader.”

While brokerage firms attract investors by promising protections against predatory HFT companies, they often do not adhere to the rules they themselves have set. Unfortunately, as it goes with corporate crime, cases get resolved with crony capitalists getting a slap on the wrist (millions in fines) while they have already raked in billions through their unethical and, sometimes, illegal practices. 

ITG’s Top 100 Reports

In 2015, the SEC charged ITG “with misleading dark pool subscribers.” The company agreed to a $12 million settlement. 

According to the SEC report, “ITG improperly disclosed the confidential dark pool trading information of firm clients. For example, from 2010 to 2015, ITG sent daily Top 100 Reports for the prior day’s trading activity […] ITG informed some high-frequency trading firms that they could use these Top 100 Reports to identify ‘potential unsatisfied liquidity needs’ in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions. “ 

Later on, in the same report, Chief of the Market Abuse Unit, Joseph Sansone, was quoted saying: “ITG failed to ensure that trading information was protected, and in some instances used this information to attempt to grow its business.” 

The allegations share similarities to the Barclays and Credit Suisse cases. I.e. disseminating information to HFTs while vowing to maintain the privacy of clients’ dark pool transactions.

Citigroup’s Potential Dark Pools

Wall Street On Parade, in a 2014 study, “suggests that Citigroup may be operating one of Wall Street’s largest collections of dark pools, trading stocks 24/7 around the globe in de facto unregulated stock exchanges which it operates under a dizzying array of different names.

FINRA, since 2014, has started providing more information into dark pool trading. The regulatory agency found, in a single week in February 2014, Liquifi, LavaFlow, and CitiCross (all Citigroup trading venues) traded 142,016,848 shares of stock collectively. 

The SEC eventually conducted an investigation into one of Citigroups’ dark pools, Citi Match. According to its press release, the SEC “found that Citigroup misled users with assurances that high-frequency traders were not allowed to trade in Citi Match, a premium-priced dark pool operated by Citi Order Routing and Execution (CORE) when two of Citi Match’s most active users reasonably qualified as high-frequency traders and executed more than $9 billion of orders through the pool.”

Boeing Stock Boost After the 737 Max 8 Crash

Wall Street on Parade conducted further research into dark liquidity, making some interesting findings. 

In March 2019, an Ethiopian Airlines’ Boeing 737 Max 8 plane crash-landed just minutes after takeoff. Every single one of the 157 passengers died in the tragic event.

The Friday prior to the crash, Boeing’s stock had closed at $422.54. The Monday after, it opened at $371.27. Somehow though, the stock miraculously recovered by the end of the day, reaching $400.01.

Despite the crash, major Wall Street banks (who own ATSs) urged investors to buy Boeing shares. UBS had a buy rating, Credit Suisse an outperform rating, and JPMorgan Chase an overweight rating. These banks’ dark pools collectively traded 791% more Boeing stock during the week of the crash than the week prior, per FINRA.

Does Dark Pool Trading Rig the Economy? 

With FINRA and the SEC cracking down on dark pool trading, these private forums have been under much more strict regulations recently. However, there remains a real concern as computers continue to get faster and faster by the day. When predatory brokerage and HTF firms can execute millions of trades in milliseconds, actually regulating the market can prove extremely difficult. Furthermore, with the sheer number of trades occurring without transparency, how can investors trust the public values of stocks?

Dark pool trading potentially contributes to the rigged layer of the U.S. economy, mainly created by crony capitalists and officials who have succumbed to regulatory capture. This layer has no part in our economy and has resulted in 50 years of wage stagnation and violations of antitrust laws. 

SEE how much citizens believe has been stolen through Dark Pools

Despite recent regulations, dark pools still create ample opportunities for financial groups to unethically boost profits by ripping off their clientele. Not only that, according to Wall Street on Parade, “U.S. regulators are not only allowing these quasi stock exchanges to operate in darkness, they are allowing Goldman Sachs, Citigroup, Bank of America Merrill Lynch and JPMorgan Chase and others to trade their own publicly-traded bank stocks in their own dark pools.”

The aforementioned author Michael Lewis went on 60 Minutes in 2014 and told viewers that “The United States stock market, the most iconic market in global capitalism is rigged.” Congress continues to avoid the issue of market manipulation, allowing the darkness to deepen into an abyss. Soon enough, we might be heading towards another plunge, another taxpayer bailout

Unless we, the citizenry, put a stop to it. 

The Zero Theft Movement seeks to end the corporatocracy, rid moneyed interests from politics. Our mission is and will continue to be, on waking up 330 million American citizens to the truth. We can all profit from an ethical, powerful, and safe economy if we stand up against the crony capitalists.  Will you refuse this call to action, or take action to eliminate the rigged layer of the economy? 

SEE how much citizens believe has been stolen throughout the economy

Heroism Made Easy

In under twenty minutes, you can comfortably review and vote on a report. All you need to do is decide (1) whether the case actually is theft and (2) if yes, whether the author’s estimate is accurate. 

With your consistent participation, our proposals will reach a point where they cannot be ignored. Our strength rests in our numbers (go out and share ZeroTheft with your friends and family!). The villains—crony capitalists and corrupt lawmakers—can not stop our movement when we have all of your support.

Free Educational Articles

An aware and awake public is exactly what those in power fear. We must educate ourselves on these issues, otherwise, crony capitalism will continue to hurt the economy.

On our website ZeroTheft.net, we regularly publish informative articles that teach you all about the rigged economy in small easily digestible chunks.

Standard Disclaimer

The ZeroTheft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.   

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. ZeroTheft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.