When Wall Street Goes Dancing in the Dark

Tim Mahoney, the chief executive officer of BIDS Trading, wears cuff links shaped like frogs with crowns. A friend gave

Tim Mahoney, the chief executive officer of BIDS Trading, wears cuff links shaped like frogs with crowns. A friend gave them to him when Mr. Mahoney launched his business, with the message that at the heart of every ugly start-up is a prince.

Mr. Mahoney’s company is what Wall Street types know as a “dark pool” of liquidity—an electronic space where big investors can trade large blocks of stock without knowing who’s on the other side of the transaction.

There are about 50 of these pools, at last count, with traders dipping in and out of them throughout the day. When a buyer and a seller at the right price and quantity intersect at the right time, the trade goes through, and some significant chunk of a company changes hands. Analysts estimate that about 20 percent of all New York Stock Exchange–listed stock transactions are now done in the dark.

“The challenge of a dark pool is that you have to find the other buyer,” said Mr. Mahoney, 47, a squarely built man with impassive gray eyes, as he sat behind a glass desk at the firm’s 111 Broadway offices. “So you randomly bump into each other in the dark.”

As a recent marketing gimmick, one company sent boxing gloves to the N.Y.S.E. floor; one read “No Information Leakage” and the other “No Market Impact.” The attraction is easy to understand: In the age of instantaneous communication, as soon as an institutional investor starts to move a lot of stock, traders know about it—the price rapidly shifts to the mover’s disadvantage, and his profit on the transaction is lost. Thus, he may try to “work it in the dark.” 

Dark pools have been springing up at a rapid clip over the last several years, but the concept is as old as the market itself. The first time Mr. Mahoney encountered a “dark” order was 1979, his first year at the American Stock Exchange, running orders back and forth across the floor.

“I had this really big order,” he said. “I’m 18, I’m like, This is pretty exciting. So I call the broker over, and I’m feeling kind of confident, and I actually knew to say, ‘Danny called up, he wants to buy 100,000 shares of this at blah, blah, blah.’ And I tried to say it as fast as I could. So he writes down 50,000 shares. And I go, ‘Hey,’ and he says, ‘What do you want, College?’ I said, ‘You heard what I said.’ He said, ‘I heard what you said.’ And I go, ‘So, why?’ And he goes, ‘If I wrote 100,000 shares down, and I went out into the crowd, anyone could look over my shoulder and see I had 100,000 shares to buy. Let me ask you a question, College. I walk in there with 100,000 shares to buy, and there’s 10,000 shares traded, and there’s no stock offered, what’s going to happen?’ I say, ‘Stock price is gonna go up.’ And he says, ‘Yeah, and I don’t want that to happen, do I?’ And I say, ‘I don’t think so.’ And he goes, ‘So, I’m not gonna do that. Don’t say what you’re gonna say: Why don’t I hold it close? Haven’t you ever heard the phrase hold your cards close to your chest? Everyone’s gonna know. So I put a smaller piece on here, and write reports. No one knows exactly how much I have to buy, and I know I have 100 to do, so it’s gonna look like I’m doing 25, and I’m gonna keep replenishing it. So I only have 25 on top, in case anybody sees it, and I have 100 below it.’ So that’s really what a hidden order is. It’s really a dark order—you don’t want to tell the world what you’re doing, but you want to buy it.”

Dark poolers have an arsenal of analogies to explain what they do. Mr. Mahoney talks about the tools needed to build skyscrapers vs. treehouses (i.e., big institutional trades vs. small orders), or using text messages to communicate rather than talking over the phone. Jim Ross, chief executive officer of the New York Stock Exchange’s MatchPoint, prefers the soft language more often heard in a therapist’s office than the exchange floor.

“Those are some amazing trades. They’re natural market participants coming together and finding one another,” said Mr. Ross, 46. “We’re a dating service for orders. What I’m trying to do is bring the liquidity that people are not comfortable expressing from the transparent world into ours.”


NOT EVERYONE IS SO CONFIDENT that dark pools are an innocent refuge for shy stocks. Boston University law professor Charles Whitehead, formerly an executive at Citigroup, wonders why they would be there in the first place, unless they had something to hide.

Usually, he explained, managers of mutual funds and such move that kind of volume to adjust to shifts in the composition of the Dow or S&P 500—they need to get out of one position and into another, fast, in order to keep up the fund’s performance relative to the market. “It has nothing to do with whether that stock is good or bad, just means that I should sell the damn stock,” said Mr. Whitehead. “I’m doing it for purely mechanical reasons.” Users of dark pools are not the platonic investors that Mr. Ross envisions, interested in the health of companies as worthy recipients of their capital, according to Mr. Whitehead. They’re merely keeping up with the index.

More fundamentally, there’s no way to know who’s buying what—and in this age of market insecurity, with mortgage-backed securities and credit default swaps clouding the air, that makes traditional traders jittery.

“It all comes down to transparency and accountability, and there is no transparency in a dark pool, there is no accountability,” Dave Henderson, a floor trader on the New York Stock Exchange, told Fox Business last August. “I wish they weren’t around.”

Barnard senior Lydia Doll, who recently landed a job at MatchPoint for when she graduates in May, has a solid understanding of what the dark pool does. But she hasn’t had much practice parrying the inevitable skepticism that the concept arouses.

When Wall Street Goes Dancing in the Dark