Shedding Light on Dark Pools

Hearing the very expression “Dark Pool ”, often makes potential investors and newcomers feel uneasy. Since dark pools are a way of operating in the shadows, it is to no one’s surprise that they are often connotated as also being shady business.

As such, it is very important that investors know exactly what happens in dark pool.

First off, yes. The dark pool is a platform which is used to hide large transactions from the general public. However, this doesn’t correlate those transactions with being shady, with some sort of attempt at manipulating the market, with tax evasion strategies, or with illegal activity, somehow.

In reality, these transactions are done this way as means to attain or avoid certain things.

Avoiding prices to plummet

Whenever someone dumps a great amount of crypto or stock back into the market, as the laws of supply and demand constantly reminds us, they can effectively change their price.

Adding supply, lowers demand and, consequently, lowers the price, and let’s face it: no one wants the price to plummet as they close their positions.

Avoiding general market-wide fear

Following the last point’s logic, when a whale sells, people tend to notice and can interpret that behavior in many ways.

Whales are constantly under the eye of many other traders and their sudden sell off might make others follow suit, inducing fear into the market and potentially crashing the price along with it.

Avoiding Slippage

Slippage is term used in finance for what happens when put in a sell order for a certain amount, only to be able to sell it for a little less.

Sometimes, when investors want to sell something immediately, they have to give it some “give”.

Consequently, the more they buy or sell, the more slippage they will come across and must be comfortable with.

Getting an average price

Dark pools allow traders achieve a guaranteed price for all their assets.

They’ll pretty much interact with the dark pool by pitching what they have, and, in turn, the dark pool will return the price it can afford.

By doing so, the investor will know exactly how much he or she can actually get for their assets, instead of guessing how much they may or may not be getting from them on an open market.

In the crypto ecosystem, for example, most dark pools will operate with a Limit Order system, rather than a Market Order one as the first allows for investors to determine the price they way, whereas the latter allows for them to determine the time in which they want to sell (instantaneous but with the added cost of slippage).

Wrapping up

If you ever read Thus Spoke Zarathustra, by Friedrich Nietzsche, you are probably familiar with the line “I am a forest, and a night of dark trees: but he who is not afraid of my darkness, will find banks full of roses under my cypresses.”

Investors probably feel the same way regarding dark pools as there many, many benefits to using them.