Stock markets uncovered: What you need to know about ‘dark pools’

Julie Brownlee, Fsp Invest, 07 Aug. 2014

Tags: dark pools, dark pool, what are dark pools, pros and cons of dark pools, jse dark pool, stock market dark pools

You’re probably familiar with the workings of the Johannesburg Stock Exchange. But did you know there’s a ‘dark pool’ lurking there?

So what is a dark pool? And why do stock exchanges offer them?

Read on to find out…

What are dark pools?

Dark pools are a form a private stock exchange.

What makes them different from ‘normal’ stock exchanges is there’s less information disclosed about what goes on than a traditional stock exchange. In other words, orders remain hidden until they’re complete.

Big investments banks, such as Barclays, tend to own dark pools.

Large institutional investors, like pension funds, use these exchanges for some of their trading.

What are the advantages of dark pools?

The main advantage of dark pools to big investors is they can use them to buy and sell shares, but they only have to publicise the trade after it’s completed.

This isn’t the case when you trade on the ‘normal’ stock exchange.

This is beneficial to large investors as they can deal in large volumes of shares without prices moving against them. In the public stock market realm, the price can start to move as soon as other traders start to realise what the big buyers and sellers are up to.

An added bonus for big investors is they tend to have lower costs than trading through the main stock exchange.

What are the disadvantages of dark pools?

Some market participants criticise dark pools as they believe they make the market less transparent.

You could view them as unfair to smaller investors as they can’t see exactly how much buying and selling is going on.

Dark pools on the JSE

A few years ago, the Johannesburg Stock Exchange launched its very own dark pool. The JSE allows any member of the exchange to participate in trading in the dark pool. In other words, all stockbrokers can access it.

Through the dark pool, investors can trade ordinary shares, preference shares and exchange traded funds on the JSE’s main board and the AltX.

So there you have it, what you need to know about dark pools.

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