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Dark Pools and High Frequency Trading For Dummies by Jay Vaananen

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Chapter 2

Taking a Dip into Dark Pools

In This Chapter

arrow Knowing what dark pools are (and aren’t)

arrow Comprehending how dark pools work

arrow Identifying the rewards and risks

arrow Figuring out whether dark pools are right for you

The term dark pools has been bandied around in the past few years in the financial world. What are they? What happens in them? Who runs them? The name is actually far more sinister than the real thing. Dark pools are simply places where stocks are traded ‘off exchange’. In other words, they’re an alternative to stock exchanges.

Stocks were traditionally traded in a stock exchange. Now, thanks to computer algorithms and increased volumes in stock trading, these new venues called dark pools have sprung up where stocks are traded. They pool together different investors’ orders and match them up. In fact, they do exactly what an exchange does; the only difference is that executed trades aren’t disclosed to the public immediately.

This chapter examines dark pools and explains what they are, how they operate and why they came about. This chapter tells you how they evolved and ...

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