Everything You Need To Know About Crypto Dark Pool Trading


The dark web is something that has become a popular idea on account of social media and media portrayal in recent years. Many people are fascinated by this idea and they are intrigued about any content and participation option that is available to them.

Cryptocurrency trading is done wholly on digital platforms and therefore the number of Dark Pool participants is many in the cryptocurrency markets. Anyone interested in learning more about dark pool trading and how they can venture into this field can benefit from this article.

What is Dark Pool?

Dark Pool is a type of private exchange that is hidden from public investors. The main purpose of Dark Pools is to place large orders so that they do not impact the market prices of a given asset. It is an organized financial exchange or trading forum that is used for trading cryptocurrencies or securities.

Investors can interact on dark pools without exposure until the trade has been completed and reported. They fall into the category of Alternative Trading Systems or ATS.

In this manner, Dark Pools grant the opportunity to the investors for dealing with bulk purchases and sales in a manner that the main public remains impervious to these changes and there are no big price changes in the spot market on account of the massive tradeoff.

What is Dark Pool Trading?

Dark Pool Trading is a method of using these hidden trading platforms to perform sales or purchase new assets. It is important to note that not all dark pools are unregulated. Many Dark Pools are owned and operated by regulated and known financial enterprises and they are registered with the relevant financial regulators.

To participate in Dark Pools, investors require special permission from their operators and in this manner; they can join the hidden marketplace.

In most cases, Dark Pools are accessible to high net-worth traders or Whale investors who can purchase or sell massive amounts of assets such as cryptocurrencies or securities. Even though Dark Pools are hidden from the public markets but they are still considered an intrinsic part of the whole trading ecosystem.

It means that any trade taking place in the dark pool can have an overall impact on the price and other dynamics of an asset in the public markets. In most cases, dark pool trades are reported to the public markets once they are completed.

How does Dark Pool Trading Work?

There is a common misconception that Dark Pools are related to the Dark Web or the deep web on account of their naming choices. However, in reality, the Dark Pools do not have anything to do with the hidden web or hackers.

Dark pools are hidden from public access alone, which means that the operators of the Dark Pools design them in such a manner that only permissioned individuals and corporations can participate in them. In simple terms, we can say that Dark pools are private cryptocurrency exchanges in reality.

It is possible that some major cryptocurrency exchanges took to Dark pools when they want to list a new cryptocurrency on their platform or refill an already listed currency or delist a cryptocurrency to sell it away.

However, since Dark Pools are registered entities, it means that even private traders are bound to report all these purchases and sales in their financial reports to the relevant regulatory agency and make them public.

In most cases, Dark pools are registered with financial agencies that overlook all their activities and receive regular briefs or financial reports about all their activities. Since the cryptocurrency market is a global trading phenomenon, the dark pool of cryptocurrency is now open to small-scale traders as well as big players in the market.

Origin of Dark Pools

It is important to note that Dark Pools existed before the advent of blockchain and cryptocurrencies. When investors were working with securities and stock markets, Dark Pools were present and helping market movers working behind the scenes.

The first dark pool emerged in the 1980s, to fulfill the need for a growing marketplace where mega-financial enterprises can trade without causing too much excitement in the markets.

At the same time, these Dark pools also granted the ability of bulk traders to keep their identities hidden from the public. In this manner, there was little chance of market manipulation.

In this manner, some of the biggest financial enterprises in the world started to open dark pools for traders to facilitate them. Before the presence of Dark Pools, every major purchase or sale of a given asset could stir massive volatility in the public markets.

Therefore, it could increase the trading risks for the general public and other stakeholders. Dark Pools were able to operate after getting a green light from the Securities and Exchange Commission.  In 2005, SEC passed a new legislature for electronic trading that was intended to encourage competition and reduce transaction fees.

It is important to note that most Dark pools have smaller trading fees in comparison to streamlined trading platforms. ITG is attributed to introducing the first ever dark pool used for intraday trading named POSIT.

For 20 years after the emergence of the first dark pool, all trades taking place in such spaces represented only 3-5% of the total market volume. In some instances, dark pool trades were mentioned as upstairs trading. Another major change took place following the 2007 ruling of NMS or National Market System by the SEC.

As per this ruling investors were able to legally bypass public markets and use dark pools for pricing advantages. The following decade since NMC ruled dark pool trades and markets increase in volumes and number by leaps.

What is Dark Pool Liquidity?

Dark pools are also touted to provide investors with additional liquidity. For reference, Dark pool liquidity is the trading volume that is created by institutional investors and orders. A major portion of dark pool liquidity is generated by block trades that took place outside the confines of central stock markets and exchanges.

In most cases, dark pool investors and liquidity providers are institutional investors due to the scale of the trades. The term upstairs market is specifically reserved for dark pool liquidity.

The most frequent and common participants of Dark pools are enterprises such as asset management firms, Insurance companies, investment banks, etc. It is important to keep in mind that dark pools are essentially legal by design however they are often criticized by financial experts on account of their anonymity and hidden exposure from public traders.

Some financial stakeholders also view dark pools to grant an unfair advantage to a limited number of traders on account of their investment capital.

What is HFT in Dark Pool Trading?

HFT or High-Frequency Trading is the phenomenon of performing bulk trades in a matter of seconds on dark pools. On account of the improving technology, algorithms, computing power, and internet speed traders are now able to perform large-scale trades in a matter of a fraction of a second.

On account of this advantage, institutional traders can move millions of worth of cryptocurrencies from one place to another before public traders. In this manner, they can get a leg ahead in the race in comparison to all others.

The HFT traders can capitalize on every fractional uptrend or downtrend before the rest of the market can make their moves. Therefore, day traders can print millions in profits using instant HFT trades in a matter of seconds.

However, on account of the increasing HFT trading volume it started to clog the financial markets. It happened because all HFT trades need to be spread around multiple exchanges to complete the execution cycle.

As soon as, one HFT trade took place all the competitors in the market were notified and they also delve into the same HFT order that ended up creating famines or floods in the public exchanges.

Big players were able to wipe out a particular asset or inject them back in huge quantities using HFT trades. Therefore, the prices of the assets started to experience massive volatility. All of these HFTs could take place within a matter of milliseconds.

It meant that one cryptocurrency or stock could lose its entire value or gain an unusually inflated price in a day without any reason. To prevent instability in the public markets, some of the biggest financial enterprises joined forces to create dark pools or private trading exchanges.

In this manner, the big players were able to perform HFTs without stirring the pot in the main markets. All the major traders who wish to perform a private trade can use dark pools and remain anonymous.

According to statistics, there are about 64 dark pools operational in 2022 within the USA along and they are used and operated by investment banking enterprises for the most part.

Operation of Dark Pools

Dark pool liquidity is stored on off-markets using the FIX and FAST APIs. However, since the liquidity is not defined there is no perception or measure of the market depth in Dark pools. Dark Pool traders can work with the public exchange limit order books but maintain their identities and order details such as unit price. Dark pool records are sent to the National Consolidated Tape as over-the-counter trades.

Dark pool operations are not scaled in public markets. However, the algorithms for the public markets have become more adaptable to sensing the smallest price changes on account of increasing dark trading practices.

Therefore, it has become more difficult for dark pool users to perform block trades without affecting the public markets.

Furthermore, dark pool operators are also privy to the regulatory requirements in comparison to public traders. Here are some of the important factors related to Dark pool operations:

Iceberg Orders

There are some markets where dark liquidity is displayed within the limit order listings. It is done using iceberg orders. Iceberg orders are private orders that contain a display quantity as an additional feature.

However, this display quantity can be smaller than the overall order size. An iceberg order is also lined up with all the public orders but their display quantity is added to the market depth. The order keeps moving to and fro in the public order queues until it reaches its underlying real quantity.

Price Discovery

Price discovery is a determination of the price of an asset on account of its demand and supply concerning time. However, dark pool trades are anonymous and their details are made available to the public traders after completion in the form of a consolidated tape.

In this manner, the post-trading transparency of dark pools is added to the lit markets or the public exchanges to maintain a relatively healthy and organic price discovery process.

Market Impact

The market impact of the hidden liquidity and the anonymous trades that come from the dark pool is reduced but still, carries some impact. The technical analysts can sense the market slowing down or accelerating on account of these hidden orders.

Public traders have the option to reduce the speed of their orders by crossing orders with only dark liquidity or increase the speed by increasing their market impact in comparison.

Adverse Selection

The displayed market operators can benefit from the dark liquidity by predicting the size of the remaining liquidity following every order. In this manner, they can predict the market price changes that are influenced by the dark pool operators and place trades using the adverse selection method.

Dark Pool Crypto Trading vs Crypto Trading

Dark Pool trading is very similar to regular or public trading in many ways. However, the difference between the two options lies in the crypto trading pairs. The users who wish to participate in dark pool trades must train and acquire more information before venturing into these positions.

The investors can take advantage of techniques like cryptography and use Multiparty Computations or MPCs for maintaining anonymity. Dark pools are ideal for investors who are working with block trades or bulk trades. The Dark Pool platforms can break down the block trades into smaller fractions using machine engines.

However, with DeFi the investors are already able to maintain their anonymity using regular decentralized exchanges. Under these circumstances, it is up to the individual trader to measure whether a dark pool trade is useful for them or not.

According to SEC statistics, dark pool participation has been shrinking consistently. The main cause of this decline is the increasing volume of retail crypto trades. It indicates that block traders in the crypto markets are finding it easier to operate on retail markets.

On the other hand, there is always a lingering fear about the sudden regulatory ban associated with crypto dark pools. The data projections suggest that crypto dark pools are going out of fashion and crypto-lit markets are more prevalent. H

owever, some crypto stakeholders still use dark pools to take advantage of the order size and risk mitigation properties.

Advantages of Crypto Dark Pools

Dark pools ensure that the impact of the bulk trades does not cause market volatility and impact the market sentiment negatively or destructively.

Dark pool traders can avoid the occurrence of slippage for block trades. Dark pools match block trade orders using predetermined prices to prevent slippage.

Dark pools match orders based on the best possible bid and ask prices. In this manner, they improve prices for the dark pool user that are more profitable than the lit markets.

Limitations of Crypto Dark Pools

Dark pool trades can malign the organic price discovery for cryptocurrencies. The hidden liquidity can throw off the algorithms and analysts from airing fair price projections.

The market analysts cannot gain access to Dark pool trades if they are not permissioned to participate. Therefore, dark pool traders can create an information asymmetry that could impact the accuracy of technical market analysis.

Dark pool users can manipulate the market using predatory trading practices such as HFT. One type of HFT is pinging where small orders are placed for a crypto pair. If these small orders are executed, it can tip the bulk traders and acquire all the available units of a specified cryptocurrency before any retail investor.

Dark pool trades in crypto are riskier since they are unregulated. Additionally, dark pools are also controversial on account of the lack of information available for them such as market depth and liquidity.

Is Dark Pool Trading Suitable for Everyone?

Dark pool trading by design is not for every investor. At their base, they are created to facilitate bulk traders and institutional enterprises. In some cases, investors can get price advantages and cost cuts using dark pools.

However, there are very limited numbers of participants that are operating in the crypto dark pools. The crypto dark pools are unregulated, unlike their TradeFi counterparts. Furthermore, crypto dark pools are riddled with price anomalies and predatory practices. Therefore, many bulk traders refrain from using these markets and prefer to use regular trading spaces.

Crypto is already a widely unregulated space and they are already prone to massive volatility. Ergo, the usage of dark pools in crypto offers little advantages to investors at any scale.


The term Dark pool can trigger a curious response in the mind of any cryptocurrency investor. However, the investors must weigh their pros and cons before using the much-hyped trading option.

While dark pools may have provided a healthy and clever alternative for stock traders in an era where online trading was not very common. DeFi which has made anonymity and market participation accessible to the common trader does not seem an ideal venue for delving into Dark trading pools.

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