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View Diary: Dark Pool Investing: The Secret Stock Exchange (14 comments)

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  •  Just wrong (3+ / 0-)
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    Yosef 52, GreyHawk, kurt

    I have no idea who "The Market Oracle" is, but he doesn't understand dark pools.  Ever since the passage of Reg NMS, dark pools are only allowed to transact inside the national best-bid offer.  

    So if in the public market there is a bid to buy at $40 and an offer to sell at $40.10, I can transact in the dark anywhere between $40 and $40.10.  But I CANNOT transact outside that.  While the transaction is dark, the SEC checks the fill versus NBBO data like a hawk.  Moreover, all dark transactions do get published as part of the normal consolidated quote feed.  

    In English, here's what dark pools are.  Suppose I'm an institutional investor (say, a pension fund for a large corporation with several billion dollars).  I want to buy 500,000 shares of IBM.  Now I could go into the public market and buy it-- but at any given time, there might only be 10,000 shares offered for sale.  I could take multiple chunks through the day, but then people might notice me trading, and move the price up accordingly.

    So instead I put the order into a dark pool for awhile, hoping some other institutional investor wants to sell 500,000 shares of IBM.  We trade with each other, between the bid and the offer in the public market.  That way, even though we're trading a lot of stock, we don't cause the price to whipsaw (me pushing the price up with my buy order, and him pushing it back down with his sell order).

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