What Is Crypto Dark Pool Trading And How Does It Work?
Introduction
There are so many hidden aspects of cryptocurrency trading that most retail investors are never aware of. However, these factors can make or break the markets by inspiring minor and major changes. Such an incognito component of trading is dark pool trading.
This article will help the reader to gather all the necessary information they require to understand this subject. At the same time, it provides a comparative analysis of the regular trading practices for the users.
What is a Dark Pool?
A dark pool, as its name suggests a mysterious place. However, the mystery is intentional to guard the benefits of the investors and preserve the price integrity of an asset class. Dark pools are hidden liquidity pools where the investors come together to perform massive transactions.
These markets can be classified as a type of Over Counter or OTC forums. With dark pool, access to the market is open for everyone, but it grants anonymity to the investors who are making bulk trades.
In doing so, dark pools make sure that the prices of a given cryptocurrency or stocks are not affected by a brand transaction.
How does a Dark Pool Work?
In reality, dark pool is an intangible entity such as a public limited company. It can be viewed as a series of corporations that are involved in selling and purchasing stocks or other assets. Take, for example, the process of block trading.
With block trading, investors who can purchase more than 10K units of shares or bigger than $25K worth of investment have permission to use OTC networks like Dark Pools. The prices of a stock are a sensitive matter for its issuers.
There is a good chance that the prices of a stock are going to skyrocket as soon as big investors wish to buy the bulk of its shares. However, most companies do not welcome sudden incline based on speculation as it can artificially inflate the price based on speculations which can plunge back down, distorting the expectations of its investors.
Therefore, both sell-side and buy-side block traders use dark pools to keep their transactions encrypted from the retail markets. Dark pools usually exist outside of the conventional stock markets.
What is Crypto Dark Pool Trading?
Dark pools are also part of the DeFi ecosystem. However, the whole point of blockchain is to provide transparency and financial inclusion. At the same time, Dark Pools can serve the same useful purpose for the cryptocurrency markets as they do in TradeFi.
To this end, cryptocurrency investors can open secure trading channels for institutional investors without taking the risk of massive market speculations. Dark pools are also beneficial for cryptocurrencies on account of their more frequent price volatility.
Therefore, cryptocurrency investors can view dark pools are private trading channels where the investors can perform heavyset transactions without letting their inflated impact the unit price of a cryptocurrency. It is especially advantageous in a context where an institutional investor comes in and purchases thousands of units of cryptocurrency.
The immediate impact on the prices of that cryptocurrency is going to have a pumping effect driving prices high. However, as soon as the speculation dies, the price can correct to the normal position, and it can result in massive losses and instability for the said project.
Investors that were quick to take up new positions will start to dissolve their positions at twice the speed, and the whole project can crash down.
When it comes to Cryptocurrency dark pool trading, investors are always keeping an eye on the market. Institutional investors also have their interests in mind when they are using Dark pools to purchase or sell cryptocurrencies in bulk.
When making bulk trades, even fractional changes in the prices of a cryptocurrency can add or wipe out billions from the investment capital. Therefore, cryptocurrency investors prefer to use secure Dark Pools to make these mega transactions.
Dark pools can look like a network of companies that have come together to purchase and sell massive quantities of cryptocurrencies outside of the traditional exchange markets. These dark pools can have intermediary firms or protocols.
Sometimes, they also consist of a pool of smaller brokers that break down a big unit tradeoff into smaller pieces to hide the real magnitude of a block trade. In addition, dark pools also allow cryptocurrency investors to create proposal contracts that are contemporary to RFD or RFP contracts that legally protect secret tender notices for stock purchase.
Types of Dark Pools
Investors should know that all dark pools maintain their privacy features to make sure that the market is affected by speculative forces and to ensure an organic price movement for an asset. To understand the functions and inner workings of dark pools, they are classified into three basic types as under:
Broker-dealer
The broker-dealer dark pools are entities that are operated by professional cryptocurrency brokers on behalf of their clients. These dark pools can also incorporate proprietary trading.
The price of the underlying assets that they are investing in comes from the order flow issued by the broker-dealers.
Agency Broker
Agency brokers are also sometimes known as exchange brokers. These currencies come from the markets, and they act as agents rather than the principal investor. In this manner, there is also no occasion for price discovery, and the price quotes are driven by the exchange standard.
Electronic Market Makers
The Electronic Market Makers are the type of dark pools where the accounts are operating independently, and price discovery is also absent. It is important to note that market makers are broker-like agents that work on providing liquidity in the market and have the ability to keep it flowing.
Top Cryptocurrency Dark Pool Trading Platforms in 2022
There are several dark pool trading platforms for cryptocurrencies at present. It is fairly challenging for investors to find out how to pick the best option to ensure their profits. It is important to note that cryptocurrencies often get a fractional per unit price start.
Therefore, unlike stocks, most retail investors can also use dark pools to create high-magnitude purchases in the cryptocurrency space. Here are some of the major dark pool trading platforms for the benefit of investors:
sFOX
sFOX is a dark pool enterprise operating out of the United States. The company has managed to incorporate more than 20 order books from unique exchanges worldwide. This platform has been designed keeping in view the exact function of dark pool trading but to benefit the cryptocurrency investors who are working with assets like stablecoins, NFTs, and other altcoins.
The best feature of this platform is that there are tons of orders so that the investors can find the best quotes for their intended tradeoffs.
At the same, there is a vast array of cryptocurrency listings and pairs present on the network. Another great feature for bulk traders is that they can find considerable liquidity on the network.
In addition to 10x liquidity, there is also the benefit of transparent order books. The entire path and network of the trade are provided to the investors beforehand in the spirit of full disclosure.
Oasis Pro Markets
Oasis is an investment bank first, and it has been certified by FINRA. This cryptocurrency platform can work for both cryptocurrency and digital securities. Furthermore, investors can also find stablecoins and fiat currency trading options with Dark Pool protection.
At the same time, investors can use this network for trading both registered and unregistered trading options. Since Oasis is a regulated network, it means that the investors can also participate in an Initial Private Offering which is organized by blockchains. This network is known for its simple and approachable design.
At the same time, the onboarding process is also simple and secure for this network which invites more investors to use the dark pool.
Crypto Dark Pool Trading vs. Regular Cryptocurrency Trading
Here are some objective and major differences between dark pool trading options and regular cryptocurrency trading:
Magnitude
The magnitude of the cryptocurrencies is widely different in dark pool trading and regular trading. With dark pools trading, it is natural there is a massive amount of cryptocurrencies that the investors are going to purchase.
On the other hand, with regular trading, there are no set limits as to how many units an individual investor can purchase. However, these trades are usually small-scale and, at best, in decimals. Meanwhile, the number of cryptocurrencies in Dark pool trades can rise as high as thousands to millions depending on the capital input of an investor.
Furthermore, in most cases, Dark pools work with institutional investors on account of their massive trading capital.
Structure
What a dark pool does is so much more complex than just hiding the identities of the transaction parties. A dark pool also has to sometime divide a bulk transaction into different time stamps and distribute them among smaller brokers.
In this manner, other than the concerned parties, an outsider would not be able to piece together all the trades to a singular owner. Therefore, the structure of the dark pool trades is considered complex, and it can take a lot of skill and technical knowledge to mask it from all the online digital wallet trackers and human analysts.
Trading fees for dark pools are smaller in comparison to retail investors. They can become larger as a collective; however, at the unit level, the rule of wholesale applies to them.
When a person purchases 10 KG of flour, the store may not charge them any delivery charges on account of their bulk buy. In the same manner, dark pools also often grant discounts for the investors depending on the bulk-level tradeoff they are going for.
In the same manner, there are also cryptocurrency investors who are going to want some tools for calculating all the concerned fees at every step of their trade. Many great dark pool trading platforms provide investors with all the detailed information they need before they even commence trading. In this manner, the process of bulk trading can become handier.
Distribution
The distribution channels for individual or regular cryptocurrency trading are often simple and singular. In the case of institutional investors, the dark pool trading operators need to take into account all the micro distributions taken along the way to ensure the anonymity of the contract.
Therefore, the distribution channel of a dark pool is typically complex and divided into many layers that need to be tracked at every point and with consistency.
The cryptocurrency markets are largely unregulated, but there is still an order to this chaos. There are smart contracts on blockchains that define all the terms and conditions for trade in advance. The execution of this smart contract will not happen until all the requirements are met.
In the same manner, developers also need to create smart contracts that can mix and match the complex trading structure of the dark pool trades.
When the conditions for the regular trading smart contracts are compared with the dark pool ones, they are visibly different from each other. In this manner, Dark pools are more complex, while regular trade contracts are simpler.
Profits
Due to the principle of bulk trading, the profit margins for dark pool trading are often many folds higher in comparison to regular trades. In this instance, the process of termination of a trading position is also more complex than that of regular trading methods.
Dark pools are not just about masking the purchase side of the trades; they are also used by sell-side block traders.
Advantages of Dark Pools
There are some of the advantages of Dark pools are given as under:
Decrease Impact
Dark pools play an important role in ensuring that investors can cushion the impact of bulk trades on the cryptocurrency markets. In the absence of these alternative marketplaces, retail investors can be affected by the decisions of corporate investors.
On the other hand, companies will struggle to keep their trading strategies a secret from their competitors. Furthermore, dark pools can also make use of multiparty computations or MPCs.
These protocols allow these dark pools to break down one big transaction into several smaller fragments to keep its identity hidden.
Zero Slippage
Zero Slippage is one of the best features of a dark pool. Considering that the phenomenon of slippage is more common in DeFi, the dark pool can work to provide a protective layer to investors. It is worth mentioning that slippage occurs when one party bails out or contests the failure to meet these trade requirements for the investors.
Therefore, losing a contemporary trade in the middle of a bulk trade can be a harrowing experience for a block trader.
Therefore, by mounting the transaction on a dark pool, investors can map out all parts of the deal into smaller components and conduct research that prevents them from getting into these products.
Price Appreciation
Price Appreciation is a great function of the dark pools. The multiplier effect hits the market when these dark pools find a perfect match between the two parties looking to bulk trade.
Institutional investors also struggle with keeping their trade proposals secret from the market, and they need secure platforms to submit applications, prepare proposals, conduct negotiations, and finalize the bulk trading contract without leaking the information into the main markets. Dark pools serve all these purposes.
Limitations of Dark Pools
Here are some of the most well-known dark pool limitations that are associated with Dark Pools:
Price Discrepancies
There is a danger of price discrepancies happening with dark pool transactions. If the dark pool takes its price reference from the price markets, it means that these spot prices can change amid a bulk transaction, and it means that the investors have to make unexpected price expectations that can burn down their profits or deepen their losses.
Information Asymmetry
There is a considerable amount of information asymmetry associated with dark pools. Cryptocurrency investors join the space in the first place in the spirit of full disclosure.
Therefore, retail investors might not always agree with the idea of keeping bulk trades a secret. Some hackers and journalists can track these channels down and publish this information on account of the lack of regulatory clarity for cryptocurrency dark pools.
Predatory Practices
Dark Pool can be an accessory to unfair market practices such as pinging. It is a process where large investors fish out important trading pairs using dummy contracts for smaller firms.
When their bait is taken, they are notified about the potential of a bulk trade and scoop all the cryptocurrencies into the dark pool.
Transparency
There is a concern among investors concerning the privacy of all their trades. All the transactions on a blockchain are openly available for all users in the form of on-chain data.
On the other hand, developers can track all the movement and trading activities happening from a bulk account. Furthermore, the dark pools for crypto are largely unregulated.
Conclusion
Dark pools are interesting entities that have a significant impact on the market, acting from the shadows. Therefore, retail investors should take an interest in them and share their opinion on the matter within their native crypto community.
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