What Are “Dark Pools” and How Do They Affect the Calculation of the Effective Spread?

Dark pools are private forums for trading securities and derivatives that allow institutional investors to trade large blocks anonymously, without publicly displaying their orders on the exchange's order book. Trades executed in dark pools are reported after the fact.

Because the price is negotiated and often better than the lit market, dark pool trades can lead to a narrower effective spread for large orders, but they reduce overall market transparency.