A little background about how trading works.

The price of a equity directly depend on the amount of buyers and sellers in the market. The medium in which these trades execute vary greatly. It actually gets extremely hazy when you include public exchanges, market makers, darks pools, OTC trades etc.

The main one we'll cover today is Dark Pools.

What are Dark Pools?

Dark pools are private financial exchanges where securities can be traded, primarily by institutional investors, without public transparency.

An example, WVU specific...

Let's say we are in the Mountainlair buying and selling our used past textbooks so we have money to go out. A bulk seller comes in and walks up to the 2nd floor and sells 20 books to a bulk buyer. No one on the first floor knows how many books were sold nor at which price. This is similar to how dark pool trading works.

Why it affects you

As of January 2025 Data (Bloomberg) 51.8% of total trading volume is traded on the dark pool.

Inaccessible to you, at least in the moment. Institutions are obligated to report there trades to FINRA which gets publicly released every two weeks.

Institutions can see every single trade you place, while you can see less than half of theirs. That is - if you even look at / have access to the public order book.

Dark Pool's Purpose

They were initiallly created to stop two things.

Front Running
Large drops

Front Running PRT example.

Let’s say your trying to get downtown for class, so you queue up at the PRT station downtown. You press the button. The system knows a pod will soon arrive to take you—and maybe a few others—to your destination.

But here's where it gets shady…

A group of “computer science students” have hacked into the PRT system. They get alerted whenever someone presses the button. So, as soon as they see you request a pod to downtown, they quickly press the button themselves milliseconds before you—even though you were there first.

As a result:

Their pod shows up first
They jump in and get moving.

Large Drops WVU example.

Let's say you're downtown buying a hot dog stand that sells 200 hot dogs per day for $10,000. If you went to the street corner and announced "I'm selling my hot dog stand for $10,000!" everyone would know. Other hot dog stand owners might panic and lower their prices, thinking demand is dropping.

Instead, you quietly meet with a buyer in the library and make the deal privately. The market stays stable because other vendors don't know about your specific transaction.

Takeaway

Awareness is key. While dark pools might sound shady, they were originally built to maintain market stability and prevent large trades from disrupting prices. But for everyday investors like you, it's important to understand that you're playing in a market where over half the volume happens behind the scenes.

The more you know, the better you can navigate the game.