Dark pools explained

hi my name is patty Hersh I'm a senior editor marketplace today I want to talk about dark pools these are not dwelling places for ancient sea monsters they're actually exchanges where shares are bought and sold but unlike the Nasdaq or the New York Stock Exchange they're not public so you can't tell who's buying and who's selling they're actually all that the trading is actually done in the dark so how does it work and why are people slightly concerned about it it's there see if we can explain okay okay as in any exchange you've got a buyer and a seller so let's have a look at our seller here is his name Sam okay and Sam runs a large a large pension fund and he's got a large block of shares that he wants to sell now if you were a pen if you're involved in a large pension fund like Sam's people are watching you all the time very carefully to see what you're doing because you can be kind of a bellwether for the market or certainly an indicator of what other investors should do so here he is with his large block of GE shares okay let's say there is a billion dollars okay and he wants to sell these if he went to the New York Stock Exchange a number of things would happen firstly people would see Sam coming to the market and they'd be like oh so Sam has got a large amount of GE shares to sell that might send a message of it in itself and move the market I mean imagine if Warren Buffett comes out as a seller people know he's got a big block to sell that certainly does things secondly the amount that he has is very large and when you chuck a large amount of shares like that into the market it creates a ripple and it can actually impair what your going to be able to sell air those shares for so I mean say they're trading at you know hundred and fifty dollars he may have to break the the block down in order to sell it because it's difficult to find people who want to take a billion dollars at one go so as to break it down and as he pushes the shares into the market you know people see the weight of it and that's and that so-called technical pressure pushes the price down so maybe in the end the last block that he sells and it gets 120 M dollars a share so he ends up with an IRA --get much less than he would get if he sold the whole thing at one go okay so Sam when he looks at the New York Stock Exchange and he looks at the amount that he wants to sell maybe assists himself you know what maybe I'd like to do this somewhere else maybe I'd like to do this in a dark pool okay so because that knee looks like for a dark pool and there are many these days and the a finds one one that's suitable and you know looks good to him so we have straps on his straps on his mask miss snorkel and he jumps right on in and when he gets in there it's very dark inside okay the reason it's called a dumb pool because it is dark and people are in here now whispering to each other okay I've got a better G here I'm looking to buy some G so all whispering to each other communicating telling each other electronically what it is that they're looking for and what it is that they have so Sam's an Aries whispering through the electronic system that he's got a billion dollars at G to sell and the system the electronic system matches him up with another buyer totally anonymously nobody knows who's in nobody knows who the buyer is nobody knows who the seller is none of these people know who they are they were all just connected in this dark pool electronically okay so here's Sam this mask on and and here's his buyer this buyer says yep I'll take I'll take a billion dollars a G so the transfer is made okay Sarge EE shares go across once the transactions made at the price that you know Sam was looking to sell out everybody hops back out and they get back on with their lives the first thing that Sam does are one of the first things that Sam does is he announces to the world that he's made this trade he's a public company as a public pension fund he's got a he's got to be upfront about his trades so that's people know that he's sold that billion dollars in G now the buyer may not necessarily be a public fund could be a private equity fund could be a hedge fund but in this case the buyers name is Alisa she is and she also is involved in her public pension fund so she lets people know that she has bought a billion dollars in General Electric stock there we go now the world knows and the world can go about its business and maybe the market will react to that maybe it won't maybe will react to the fact that Sam is sold maybe it won't but it certainly won't react to to the fact that the sale is happening at the time that it's happening and that's really what Sam wants to avoid so it's easy to see why Sam would want to get involved in this and also Alisa because say she wanted to buy a block of a billion dollars might be quite difficult to do that in the in the public market because Sam might feel that he's forced to in the stock exchange New York sake soon said this he might feel these force to break it up into pieces and ELISA might not get the the full before whack that she wanted okay so there is a there is an advantage for ELISA there as well the people that there is less of an advantage for arguably our individual investors because these dark pools are genuine generally used primarily by large institutional investors and large and people with large amounts of money you've obviously sort of minimum amounts to trade and so it shuts em a proportion of the market out individual investors or smaller investors who want trading these sort of gargantuan blocks are then kind of left on the sidelines and there's a real concern that well there are two concerns the first concern is that em these dark pools are kind of sucking energy and sucking activity away from the New York Stock Exchange in the Nasdaq and obviously those that the exchanges are very worried about that the second concern is that a lot of the it means that as these as these m dark pools become more numerous and take up more space it means that much more activity much more the stock trading activity is going on in the dark it's going on in secret away from the public eye the great thing about the New York Stock Exchange and the Nasdaq and other exchanges is that it's all public you know who the buyer is you know the seller is you know how much is being traded at any one time in these dark pools you have no idea until the trading is done and something in some cases if if it's done by private sellers if Sam and ELISA were both public eight private equity funds for example you might never know what traded occurred at all so there's a real concern that because all of this activity is being conducted in the dark and away from the public means the public are are less empowered have got less power and have less knowledge m to to be able to transact with their own shares and their own sales and that's one of the reasons that there's a lot of muttering going on about maybe these dark pools should be regulated or perhaps they're controlled in some other ways I mean let's face it if you're an individual investor and you want to buy or sell GE and you know that you're hoping to get a certain price for it and then suddenly an enormous transaction like this occurs and you find out the day after or the minute after Sam has announced his dark pool trade that G's traded a certain amount perhaps the price falls away perhaps that you know that the market drops away from underneath you you've been hoping to get a certain price for your tiny little block of shares but if you were counting on that money let me tell you I could think it could very badly leave you needing a very large drink

Channel: Marketplace APM

Views: 146,130

Rating: 4.9359231 out of 5

Keywords: whiteboard, banking, marketplace, business, dark pools, economics, Paddy Hirsch, NPR, radio, money, banks, finance, Borrow, Spend, Cost, Supply, Demand, Big banks, Put up dough, Stake, Trust fund, Exchange, Barter, Vend, Offer, Auction, Traffic, Unload, Deal, Dump, Hustle, Recession, Austerity, Financial crisis, Thrift, Layoff, Field, Trade, Work, Career, Livelihood, Occupation, Vocation, Commerce, Financial affairs, Money, Accounts, Economy, Analysis, News, regulation

Id: hq9waP7goSc

Length: 7min 9sec (429 seconds)

Published: Mon Jul 06 2009

Reddit Comments

[u/Layskettlecooked]

This needs to be at the top of this sub

[u/Walking_on_fire]

Hmm, 🦍 is confused 🦧🦧🦧

I can understand the reason why Institutional Buyers like to trade huge deals 1Billion shares, as in the whiteboard, in a dark pool. They get the deal done in one trade, for the price they are asking, without any market volatility.

But why is Shitadel trading 1 Billion Shares in more than 3 Million transactions? Thats measly 333 shares per trade. If trades in a dark pool are not affecting market prices on NYSE, what is the benefit here?

Any Ideas?