Written by: Lucia Amanda Rumengan & Arya Gastiadirizal Purnama
Designed by: Zalika Afarin
Imagine if a company suddenly traded thousands to millions of shares in a short period of time. Such action would certainly cause significant price movements on the stock exchange. However, there is a way for investors to do this without causing a significant effect on stock prices on the stock exchange, namely by trading through the Dark Pool Market.
In the midst of rapid developments in the modern financial industry, nearly all trading activities have become digitalized. This transformation has paved the way for numerous innovations and conveniences, including in stock trading. However, as transaction speed and volume continue to increase, a new need has emerged among investors to execute large-scale stock transactions without disrupting market stability. From this need arose a concept known as the dark pool, a specialized venue where stocks are traded outside the public market. Through this mechanism, investors can place large orders without significantly affecting the stock’s market price.
Dark pools serve as a medium for investors to conduct large transactions without public disclosure, thereby reducing market impact and maintaining the confidentiality of their positions. The mechanism involves large institutions submitting hidden buy or sell orders, which are then internally matched by the dark pool system without being displayed to the public. Once executed, the transaction results are reported to the public exchange, often with a slight delay. The purpose is to prevent large trades from causing significant price movements in the public market. Dark pools are operated by investment banks, broker-dealers, independent firms, and public exchanges. Although dark pools are recognized and regulated as part of the official financial infrastructure in many jurisdictions, they are not legally permitted in Indonesia, where principles of openness and transparency in capital market regulation take precedence, causing such practices to conflict with national regulatory frameworks.
Dark pools first emerged in the 1980s as a response to investor concerns over the ripple effects caused by their large transactions, beginning with Instinet’s After Hours system in 1986. Early dark pools operated through anonymous crossing mechanisms, in which orders were matched anonymously at specific times using the market’s closing price. These systems were relatively simple and limited to large block trades between institutions. Technological advancements, along with the introduction of Regulation ATS (1998) and NMS (2005), accelerated the expansion of dark pools, making them more liquid, more integrated with order-management systems, and no longer restricted to extremely large block trades. Today, dark pools function not only to mitigate price impact but also to limit exposure to high-frequency traders, apply midpoint pricing, and leverage far more sophisticated matching algorithms than the manual crossing of the 1980s.
One of the largest and most well-known dark pool platforms is Liquidnet. Liquidnet was established in 1999 and officially launched in April 2001 with the vision of creating an alternative trading system for large institutional trades. It introduced a dark pool for institutional equities, enabling large institutions to trade substantial stock volumes anonymously and without public exposure. In 2015, Liquidnet expanded by launching a dark pool for fixed income, allowing institutions to transact corporate bonds through a private, non-exchange system. After its acquisition by TP ICAP in 2021, Liquidnet continued to strengthen liquidity, particularly in the fixed-income market, by leveraging TP ICAP’s global dealer network. To maintain trading integrity within a non-public environment, Liquidnet operates Liquidity Watch, a team that monitors trading activity in real time, analyzes the behavior of members and sponsored liquidity providers, and handles complaints to ensure fairness and transactional security.
Despite the many efforts to uphold market integrity, dark pools still carry inherent advantages and disadvantages linked to their operational structure. They allow large orders to be executed without shaking the market, preventing price spikes that would occur if massive trades were exposed in the public order book. Transaction costs also tend to be lower, offering added efficiency for institutional investors managing substantial funds. However, dark pools also raise concerns, including limited access for retail investors, low transparency, and fears that operators may misuse order data to trade against their clients. This creates a paradox within price discovery mechanisms: on one hand, dark pools preserve price stability by hiding large orders to avoid market disruption; on the other hand, they widen informational gaps between large investors and retail participants.
The confidentiality inherent in dark pool mechanisms raises an important question regarding how transactions are recorded and reported. From an accounting perspective, the methods used to recognize dark pool transactions do not differ significantly from those applied in public stock exchanges. Each financial instrument traded must be recognized under IFRS 9. However, because dark pools are private and do not provide an open order book, their transactions are almost always categorized as Level 2 or even Level 3 fair value under IFRS 13. This requires companies to record fair value based on observable inputs when available, including prices from dark pools, or to apply alternative valuation techniques when such inputs are unavailable.
The term “dark pool” may sound suspicious, but it represents a legitimate digital-finance innovation that continues to evolve. Its existence addresses the need of large institutions to execute substantial transactions without disrupting market prices. Although its transparency is lower than that of public exchanges, the dark pool remains recognized as an official financial infrastructure in various countries. Accordingly, the dark pool occupies a unique position as a private trading mechanism that operates alongside regular markets.
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