Jay Vaananen

Dark pools and high frequency trading (HFT) are contentious subjects in financial markets. Billions of dollars are traded through dark pools, and HFT algorithms with just small, incremental price differences make billions of dollars. And it all can happen in milliseconds. Most importantly, dark pools and HFT are part of the current market environment.

Having a grasp of the fundamental traits of a high frequency trade helps you spot where the high frequency traders are operating and what tactics they're using. The more knowledge you have of the tactics and trading strategies used by high frequency traders, the better equipped you will be to avoid becoming their prey and receiving poor trade executions.

High frequency trading (HFT) requires speed quicker than the eye can see. With superior speeds, high frequency traders are able to react to news faster than market participants with inferior speed, because computer algorithms are able to analyse and produce trading instructions faster than a human can manually input an order.

Much of what happens in the markets nowadays is automated, including the time when news is released and how orders are matched and reported. Many trades are now being transacted via computer algorithms and programs. Consider this development as market evolution, because the trend to automation is only natural.

If you're buying or selling shares then you'll inevitably be routed through a dark pool at some point and your trades may well be executed there. Your broker's expertise and the services that he provides are now one of the most important parts of your investment process. Figure out what you want to do with your investments and what type of relationship you need with a broker.

It’s a risky market out there, no doubt about it. Dark pools aren’t transparent (the clue is in the name), which raises many questions and concerns as to what is going on when an investor sends an order out to the market. Many dark pools have faced fines or are the targets of ongoing investigations and fines from regulators, which hasn’t helped the cause of dark pools.

Dark pools have grown to be a major part of the global equity markets, and they’ve become a real competitor and alternative to traditional stock exchanges. Many investors are confused about dark pools because of rampant rumors, which isn’t surprising. Just the name is enough to put fear into anyone who takes an interest in them.

Dark pools are simply venues or conduits where stocks are traded. Think of a dark pool as a platform where all sorts of players — or, as the pros like to say, market participants — come to trade stocks. Unlike traditional stock exchanges, those market participants trading in dark pools have little idea of whom it is they’re trading with.