Trading in a Dark Pool? Watch for Sharks

The proliferation of alternative electronic stock exchanges known as dark pools puts institutional investors at higher risk of shark encounters.

Dark pools find matches for blocks of shares without publishing the orders or the identities of the institutions. But that anonymity can also give cover to sharp operators known as “gamers.” These traders sniff out large orders, and then try to use that knowledge to trade against the block at a profit.

“They look for big dumb elephants leaving big footprints,” said Joe Saluzzi, head of equity trading at Themis Trading.

Say, for example, a mutual fund wants to buy a big block of shares and places an order in a dark pool. Unlike on a traditional exchange, nobody can see that order until they match it – at least in theory. Read more about dark pools…