High-frequency trading (HFT) has an evil cousin: dark pools.
While dark pools are not inherently bad, the abuse of dark pools by high-frequency traders has made it easier to exploit everyone else in the market, and increases the odds that a market downturn could quickly become a stock market crash.
So what are “dark pools,” anyway?
Dark pools are off-exchange platforms that allow large investors, such as hedge funds and pension funds, to trade stocks anonymously. Dark pools arose in the late 1990s from a desire by these big players to conduct large-scale trades without tipping their hand.
Dark pools allow large investors to establish or exit positions in a stock at the best possible price. There was nothing wrong with that; the dark pools made up a very small portion of daily volume and made it easier for big investors to trade.