Dark pools are private investment venues for institutional and large investors to make anonymous trades without causing market movements. They can be concerning for regulators due to potential inequality and inside information. Access is limited and transactions are not freely accessible to the public. Guidelines have been set to minimize concerns.
Dark pools are anonymous investment venues that are not open to the general public. Institutional and large investors are the most likely to be active in these alternative investment vehicles. While not illegal, they can cause concern for regulators, and in some nations agencies monitor activities in this area of the investment community carefully. Access to these investments may be limited by capital requirements and other measures, ensuring that only experienced large-scale investors can be active in a shadow pool.
Within the pool, which may be run by a brokerage or other financial institution, buyers and sellers are matched anonymously through the pool’s trading system. Keeping identities hidden can allow investors to make large purchases and sales without necessarily causing market movements. This can be a concern in open markets where other investors will notice a large trade and it can cause panic or disruption. Investors who want to act without tipping their hand can do so through a dark pool.
No current price quotes are published on the dark funds, and transactions in the pool are not freely accessible to members of the public, let alone details of the investment vehicle. To enter, investors can do so through a broker or private institution that manages the group or has connections with it. Essentially, the dark pool acts as a private trading venue for those who need to make large, complex, or sensitive trades for any number of reasons. Private trading is permitted under securities regulations in most nations, and dark funds provide an organized method of doing so.
Concerns about dark pools surround the potential inequality that could be established with such systems. When not all traders have access to information, some traders may act on news that is not available to members of the general public. This could create an unfair advantage and, in some cases, could constitute inside information. Speculation in dark pools can create bubbles and other events just like in the open market, but regular investors can be completely unaware because the transactions took place behind closed doors.
The number of these investment vehicles grew dramatically in the early 2000s, attracting attention from outside the investment community. Examples can be seen in the US and European markets. Agencies interested in this topic have used rule-making skills to set some guidelines for activity within dark pools to minimize potential concerns.
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