The Capitalist Investor - Episode 86

In this week’s episode, Derek and special guest Tony Zabigala discuss dark pool trading. What is it, is it legal, and why is #apenation so upset about it?! You’ll want to listen to the end to get Tony’s killer “Dino Egg” recipe!

Outline of This Episode

  • [3:12] Dark Pool Trading. What is it?
  • [6:54] Why do Dark Pools exist?
  • [11:10] Pros and Cons
  • [17:40] Do we really want to know the “How”

Dark Pool Trading. What is it?

Even though it sounds like a dark and sinister topic, dark pool trading exists, and they emerged in the 1980’s. According to Investopedia “A dark pool is a privately organized financial forum or exchange for trading securities. Dark pools allow institutional investors to trade without exposure until after the trade has been executed and reported. Dark pools are a type of alternative trading system that give certain investors the opportunity to place large orders and make trades without publicly revealing their intentions during the search for a buyer or seller.” We feel it’s important to know how to navigate and understand it, listen in to hear our take on trading and selling in secret and why it gets negative stigma.

Why do these dark pools exist?

These pools exist because these large players want to liquidate their positions without setting off alarm bells, especially since most of these transactions are very large. No one knows about these transactions until the aftereffects, no news about how or what happened until its final. Finding a buyer in the dark is a great way to not spread panic through the market and cause fear.

Pros and Cons

Dark pool trading does have its advantages and disadvantages. We feel pretty comfortable in saying that 20% of all transactions are done this way in the US market. It allows for dumping off huge amounts of stock, privately. It does protect the retail investor from panic selling and buying. Selling through public exchange would mean they’re going to get less for it. If they make it through the private exchange those investors are going to get more for it and it eliminates a lot of fees, and increases market efficiency. Dark pools provide pricing and cost advantages to buy-side institutions such as mutual funds, and pension funds, which claim that these benefits ultimately accrue to the retail investors who invest in these funds. However, dark pools’ lack of transparency makes them susceptible to conflicts of interest by their owners and predatory trading practices by HFT firms. Do the benefits outweigh the negatives, listen to find out what we think.

Do we really want to know the “How”

Even though the information on these secret trading’s do eventually come to the public, would we really want to know about these transactions prior to them happening? Would it do more harm due to the panic it would cause to know the how? Just because this dark pool gets their information from within and its something the average retail investor just cant do, are we mad because most of us are late to the party? We do want to know, we do want to understand and we do want to be there. All in all, we want our share and maybe we’re just, envious?

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