How Europe's MiFID II Lets Dark Trading Stay Dark: QuickTake Q&A

Dark trading has a bad reputation. Traders use venues called dark pools to buy and sell stocks without revealing beforehand the size of their orders or the price they are willing to accept. Not tipping their hand lets them trade without moving share prices against them, but hiding bids and offers reduces the flow of information that makes public stock exchanges efficient at setting prices. New European Union rules taking effect in January, known as MiFID II, are designed to force most equity trading back onto public, "lit" stock markets, but they may be insufficient to stop traders determined to remain in the dark.

Dark pools, though accounting for less than 10 percent of European equity trading, are central to how the biggest investors buy and sell shares. Large fund managers often own stakes of 5 percent or more in individual stocks. When they have to trade a lot of shares, they prefer to do the transaction on a dark venue as a block trade. That’s become more important with the rise of high-frequency traders, who use algorithms to spot block orders and trade against them almost instantly. HFT firms make public markets potentially much more expensive than dark pools for big orders. It’s no coincidence that dark pools have grown in popularity at the same time that high-speed traders have displaced traditional market makers.