Most dark pools do not set their own price. They borrow the price from the lit market — usually the midpoint of the National Best Bid and Offer (NBBO).
Per-share saving for each side:
Savingbuyer=A−M=2A−B,Savingseller=M−B=2A−B
What is hidden in a dark pool — pre-trade or post-trade information?
Pre-trade (order size/existence). Post-trade prints are still reported publicly.
Why do institutions use dark pools?
To trade large blocks without market impact or information leakage that would move the price against them.
What reference price do most dark pools use to match?
The midpoint of the lit NBBO, M=(B+A)/2.
Per-share saving for each side at a midpoint fill with spread A−B?
(A−B)/2 for each of the buyer and seller.
What is an iceberg order?
A lit-market limit order that displays only a small peak size while hiding the bulk, auto-replenishing as the tip fills.
Name two dangers of dark pools.
No fill guarantee (need a counterparty) and adverse selection / toxicity from predatory HFT pinging.
Square-root market impact law?
ΔP≈YσQ/V — impact grows with the square root of order size relative to daily volume.
Dark pool vs lit exchange in one line?
Lit = visible pre-trade order book; Dark = no visible book, private matching, price often borrowed from lit midpoint.
What legal category is a dark pool?
An Alternative Trading System (ATS).
Why does midpoint matching feel "fair"?
Both sides save exactly half the bid-ask spread, so neither side crosses the full spread.
Recall Feynman: explain to a 12-year-old
Imagine you have a huge pile of trading cards to sell. If you shout "I have 500 rare cards for sale!" in the schoolyard, everyone immediately lowers what they'll pay, because they know you're desperate to sell so many. So instead you go into a quiet back room where only serious buyers come, and you swap cards at a fair "middle" price without anyone outside seeing. Nobody panics, you get a good price. That quiet back room is a dark pool. The catch: sometimes the back room is empty and no one wants your cards, or a sneaky kid keeps peeking in to guess how many you have.
Socho tumhe ek bahut badi quantity — maan lo 5 lakh shares — bechni hai. Agar tum ye pura order lit exchange (public order book) pe daal do, to sabko dikh jayega ki koi bada seller hai. Turant price niche girne lagti hai kyunki fast traders aage nikal jaate hain aur tum se pehle bech dete hain. Isse hota hai market impact — jitna bada order utna zyada price against you move karta hai. Yahi problem solve karta hai dark pool: ek private venue jahan tumhara order kisi ko pre-trade dikhta nahi, sirf trade hone ke baad public tape pe report hota hai.
Matching kaise hoti hai? Zyadatar dark pools apni price khud decide nahi karte — wo lit market ka midpoint use karte hain, yaani M=(B+A)/2, jahan B best bid aur A best ask hai. Iska fayda: buyer ko ask nahi, midpoint pe milta hai, aur seller ko bid se upar midpoint milta hai — dono ko half spread ka saving milta hai. Isliye ye "fair" mana jata hai. Ek aur cheez jo lit exchange pe hi size chhupati hai wo hai iceberg order — display sirf chhota tip karta hai, baaki hidden rehta hai aur auto-refill hota hai.
Lekin dark pool koi magic nahi hai. Do bade khatre yaad rakho: (1) Fill ki guarantee nahi — jab tak koi matching counterparty na aaye, tumhara order khaali baitha rahega. (2) Adverse selection / toxicity — agar dusri taraf koi smart HFT trader hai jo "pinging" karke tumhari hidden size detect kar leta hai, to wo tumhare against trade kar sakta hai, aur tum spread bachaake bhi zyada loss kar sakte ho. Aur ek confusion clear kar lo: "dark" ka matlab sirf pre-trade opacity hai — trade ke baad regulator aur public dono ko print dikh jaata hai.
