What dark pools are
Dark pools are private trading venues that allow large institutional orders to execute without displaying those orders in the public order book. They're called "dark" because the orders are hidden from pre-trade transparency — you don't see them on the bid or ask before execution.
The purpose is to minimize price impact. If a large pension fund needs to sell 5 million shares of Apple, posting that order in the public market would immediately move price against it as other traders detect and front-run the flow. Dark pools allow the institution to find a counterparty (another institution) at a negotiated price without advertising the intention.
Dark pools are operated by broker-dealers (Goldman Sachs, Morgan Stanley), exchanges (NYSE Arca, NASDAQ), and independent ATSs (Liquidnet, IEX). They account for a significant portion of overall equity market volume — typically 30-40% of daily US equity trading occurs off public exchanges.
Dark pool prints eventually show up in the tape (time and sales) after execution because all trades must be reported. Large prints at odd times or at prices that seem off-market can indicate dark pool activity. Some services specifically track dark pool prints as a flow signal.
How dark pools affect price discovery
Because dark pool trades don't contribute to pre-trade price discovery (the order book), their presence means that the displayed bid and ask in the lit market reflect only a fraction of actual supply and demand. This can make technical levels based purely on lit market data less reliable during heavy dark pool activity.
The tape (time and sales) includes dark pool prints. When a large trade occurs in a dark pool, it prints to the consolidated tape at the execution price, which was either at the midpoint of the bid-ask spread or negotiated between the counterparties. These prints can sometimes reveal institutional conviction about price levels.
IEX (Investors Exchange) was founded specifically to protect institutional investors from HFT latency arbitrage through its "speed bump" (intentional 350-microsecond delay). It operates as a lit exchange but with features designed to level the playing field between institutional investors and HFT firms.
Payment for order flow
Payment for order flow (PFOF) is a practice where retail brokers (Robinhood, TD Ameritrade, etc.) sell their customers' orders to market makers (Citadel Securities, Virtu Financial) rather than routing them to exchanges. The market maker pays for this order flow because retail orders are generally "uninformed" — they don't have superior information — and thus profitable to trade against.
PFOF creates a conflict of interest: the broker is supposed to get the best execution for its customer, but it's also being paid to route orders to a specific market maker. The SEC has repeatedly examined this practice. In practice, retail customers typically receive price improvement (fills inside the bid-ask spread) from market makers, so the impact on execution quality is debated.
The key takeaway for retail traders: your order likely doesn't go directly to an exchange. It goes through a market maker who decides whether to fill it internally or route it to the market. In liquid, tight-spread instruments, this doesn't materially affect your execution. In wider-spread or illiquid instruments, it can.