Crypto Dark Pool Trading: What Is It & Should You Try It?

The term "dark pool" may conjure up images of a sinister Hollywood movie for you, but in reality, it's a private trading platform used to keep large trades away from the public eye. Here, you’ll learn more about crypto dark pools, who can trade in them, and whether they’re worth the hype.

What Is Crypto Dark Pool Trading?

Crypto dark pool trading takes place on a private crypto exchange, and is mainly used to place very large orders.

Dark pools are not uncommon. They were created in the 1980s when institutional investors needed a place to trade large quantities of financial assets without revealing their identities.

Financial authorities didn’t object to dark pools because they facilitated the trading of exceedingly large orders without creating a panic. When orders are placed in a dark pool, it also helps stem massive price volatility that may result from a large order in the book of a public exchange.

Since dark pools are private exchanges not accessible to the general investing public, you may not be aware of their presence. However, they're an intrinsic part of the trading ecosystem. According to a recent Reuters report, there are nearly 64 registered alternative trading systems that are responsible for at least 15% of U.S. trading volume.

Due to the nature of decentralized finance (DeFi), crypto dark pool trading is also gaining popularity among crypto enthusiasts. In recent years, new crypto dark pools have emerged, and some are planned for the future. The inception of dark pools in the DeFi scene has changed trading dynamics by allowing retail traders to gain access to crypto dark pools.

How Does Crypto Dark Pool Trading Work?

Before you start learning about crypto dark pool trading, it's important to know that the concept has nothing to do with the dark web and black market. While dark pools can be a bit controversial, they’ve operated alongside the traditional market for many decades.

As explained earlier, a dark pool, or a private exchange, enabled institutional investors and wealthy traders to place large orders without disturbing the traditional market.

So, why can't large orders be placed with a traditional broker?

When a large order constituting millions of dollars is placed in the market, it can create panic. Just imagine what you would do if you recently bought a cryptocurrency, hoping the price would increase in a day or two, and someone places a sell order for millions of dollars, visible in the order book.

Your intuition would tell you that the price may fall rapidly if the order is filled, which means that now you're on the wrong side of the market. Even if the market had enough volume to accommodate such a large trade, day traders and other short-term traders typically trade on a whim. The herd mentality could quickly prompt everyone to sell their crypto, which could also fuel a selling frenzy.

This is exactly what happens if someone overtly places a large buy order. If you're in the mood to short the digital asset, a large order visible in the order book could create a price bubble, leaving you in a state of panic.

To minimize the impact of large trades, they’re placed on a private exchange away from the public eye. While the large trade impacts the final price of the asset, everyone thinks it’s the result of market dynamics. Needless to say, activities such as this aren’t the only reasons for dark pool trades — but they’re certainly the main reason. 

Benefits of Crypto Dark Pool Trading

If you like the idea of placing large blocks of trade without revealing your identity, consider trading in crypto dark pools. Here are a few reasons why it would make sense:

Decreased Impact on Market Sentiments

Private trades are a good way to keep a check on market sentiments. They also let traders place a large order without revealing their intentions. Similarly, crypto dark pool trading uses multiparty computation (MPC), which breaks down large orders, prompting security and anonymity.

No Slippage

When placing a large order on a public exchange, slippage can occur. Traders can avoid slippage in crypto dark pools because orders are matched at a predetermined price. In this setup, the trader gets the desired price.

Price Improvement

Crypto dark pool trading can help in price improvement. Since the two matching orders are based on the best available bid and ask price, the buyer and the seller get a more favorable price compared to the traditional market.

Risks of Crypto Dark Pool Trading

Due to its opaque nature, crypto dark pool trading remains controversial. Regulators and the public have always debated the legalities and ethics of trading in such a way. Before entering any crypto dark pool, make sure you're well aware of the risks involved. Here are a few:

Inaccurate Prices

Prices on private exchanges may diverge from the price available on the crypto exchange. This price difference can result from lack of regulation, conflict of interest and massive lot size.

Information Asymmetry

While crypto dark pool trading seems interesting, watch out for information asymmetry. Usually, institutional traders in crypto dark pools have access to market insight that isn’t available to retail traders. If you don't have access to such insight, trading large blocks in the market without foresight is very risky.

Predatory Practices

Crypto dark pool trading can lead to such predatory practices as high-frequency trading (HFT). One form of this activity is pinging, where HFT firms place small trades to find matching orders for a crypto pair. If the order is executed, it signals the presence of a large order, allowing the firm to scoop up all the available shares in the crypto dark pool.

Lack of Transparency

Keep in mind that when you trade in crypto dark pools, you're putting yourself at greater risk. Crypto dark pool trading can be unregulated. The model is controversial due to the lack of information. In some cases, the pool operator's proprietary traders could trade against pool clients.

Crypto Dark Pool Trading vs. Crypto Trading

Trading in a crypto dark pool is similar to crypto trading. The only major difference is the lack of crypto pairs to trade. There may also be a learning curve involved before you're ready to trade.

If you're keen on trading large blocks of crypto, then crypto dark pool trading may suit your needs. Due to the anonymous nature of crypto blockchains, advanced cryptographic techniques and the use of multiparty computation (MPC), you can confidently place large orders without revealing your identity to a third party.

Crypto dark pool trading also uses matching engines to break down large blocks. If you're willing to break your order into smaller chunks, it's a good place to be.

Despite these advantages, it's up to you to decide if crypto dark pools can give you any kind of an edge. For instance, recent SEC data reveals that the average trade size on dark pools is constantly shrinking. This decline is mainly due to the technological advancement in retail trading.

This also means that institutional investors and high net worth traders are finding it easier to trade on retail exchanges. Besides these concerns, there’s always the regulatory aspect of trading. Regulators aren’t inclined to endorse dark pools.

While the data suggests that dark pools may be losing their grip, crypto dark pool trading continues to thrive because it addresses order size and the risks associated with dark pools.

Crypto Dark Pool Trading Platforms

If you're still interested, here is an introduction to the two most well-known platforms designed for crypto dark pool trading. Consider using these as a starting point to explore your options.

sFOX

sFOX is a U.S.-based venture that offers institutional investors and professional traders a globally integrated order book from 20 exchanges. The platform is designed for crypto dark pool trading, giving you the best price execution across 80 markets. There is no shortage of crypto pairs to trade. You can trade in several major cryptos and stablecoins.

Besides advanced routing features, sFox claims to offer 10 times more liquidity and a fully transparent order book. Before initiating the trade, traders can see where and how the trade will be executed with full order book visibility.

Oasis Pro Markets

Oasis Pro Markets is a full-service investment bank and a FINRA-registered marketplace for alternative trading systems. It mainly serves institutional investors, allowing them to trade cryptos and make payments for those digital securities in stablecoins or fiat currency.

You can trade both registered and unregistered securities on the platform. Oasis is also a regulated exchange, so you can invest in an initial private offering that can be recorded on the blockchain. The platform has a simple and secure onboarding process, which further streamlines crypto dark pool trading.

Should You Try Crypto Dark Pool Trading?

There’s little doubt that crypto dark pool trading is an attractive proposition for investors looking to trade massive lots. While it is attractive, there are very few active players in the crypto dark pool market. Due to regulations and an intricate business model,  many publicized crypto dark pools never came to fruition.

Even if crypto dark pool trading were fairly common, the risk involved in trading large blocks in uncertain regulatory conditions is a huge deterrent. Price anomalies and predatory tactics are reported regularly.Honestly, not everyone with big lots advocates crypto dark pool trading.

Under these circumstances, you may be better off using a regular exchange such as Bybit that serves both institutions and professional traders. The advanced trading features and transparent order book are certainly worth considering.

The Bottom Line

Since the 1980s, dark pools have coexisted with regular trading platforms. They continue to serve a large community of traders who think they can benefit from such pools. Despite their benefits, the size of large blocks on these platforms has continued to decline, which may suggest that regular crypto exchanges have caught up with the features that once enticed crypto whales and institutions to use dark pools.