What Dark Pools Are
Dark pools are private trading venues — Alternative Trading Systems (ATSs) — where large institutional orders can be executed without displaying publicly on an exchange. They were designed to allow institutional investors to execute large orders without revealing their intentions to the market. There are dozens of dark pools operated by major banks, brokers, and trading firms in the United States.
Wholesale Market Making vs. Dark Pools
Citadel Securities operates as a wholesale market maker — a firm that directly executes retail orders sent to it by brokers through PFOF arrangements. This is different from dark pools, though both involve off-exchange trading. When Citadel internalizes a retail order, it executes that order against its own book rather than sending it to an exchange or dark pool. This internalization is the key mechanism through which the bid-ask spread is captured.
The Exchange/Off-Exchange Balance
The SEC has expressed concern that the growth of off-exchange trading — including both dark pools and wholesale internalization by market makers — may reduce the quality of price discovery on public exchanges. If too many trades occur away from exchanges, the public price (the NBBO) may become less accurate, harming even investors who do trade on exchanges. This is a structural concern that motivates some of the SEC's market structure reform proposals.
Transparency and Off-Exchange Trading
Off-exchange trading reduces the pre-trade transparency that is a feature of exchange-based markets. Regulators have responded by requiring post-trade transparency (e.g., TRF reporting of OTC equity trades) and enhanced disclosure (Rule 606). However, the asymmetry between the transparency of exchange trading and off-exchange trading remains a concern for those who believe that transparent, public markets serve the best interest of all investors.