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Dark pool investments: not always safe from predatory traders

It's certainly understandable that a large investor -- let's say an investment bank -- would be concerned with the possibility in a given case that its intent to buy or sell a high number of stock shares would result in other so-called "predatory investors" trying to jump in on the action.

Those other actors would be motivated to do so through their belief that acting quickly would secure them market gains before the bank finalized its transaction.

The bank -- or, sometimes, a mutual fund company, a large business executing a trade of its own shares, or another major shareholder -- would logically seek to guard against any advance leaking of information regarding its intended move.

Enter the "dark pool," which is essentially a stock market within the stock market. As noted in a recent Reuters article, "Dark pools are trading venues that differ from public exchanges because orders are not visible to other traders until they are executed."

For obvious reasons, that can be a truly important consideration for an entity seeking to offload or buy a large number of shares on behalf of investors. Use of a dark pool enables them, as Reuters states, to mute information concerning pre-trade price data, which can help them "trade large blocks of shares without the market moving against them."

It is easy to see how that can benefit investors.

And it is just as evident how it can hurt them when the dark pool process is not truly safeguarded against outside risks. In such a case, investors who think they are protected against predatory actors seeking to profit from pre-trade information might in fact be mistaken and flatly vulnerable to that possibility.

We will take a closer look at dark pools in our next blog post, specifically scrutinizing a recent outcome pursuant to which two major investment banks settled state and federal charges alleging that they misled investors -- to their financial detriment -- regarding dark pool information and transactions.

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