Dark pools are private trading venues that allow institutional investors to buy and sell large blocks of securities without revealing their intentions to the public market. Unlike traditional stock exchanges, where trades are executed transparently and prices are publicly displayed, dark pools operate in secrecy, keeping trade details hidden until after execution. This anonymity helps prevent market impact, as large orders on public exchanges can significantly move prices, disadvantaging the trader.

Traditional exchanges, such as the NYSE or NASDAQ, operate on a centralized, transparent system where buy and sell orders are visible to all participants. Prices are determined through open competition, ensuring fair price discovery. In contrast, dark pools use alternative methods like midpoint pricing or negotiated trades, often matching buyers and sellers internally without broadcasting orders to the broader market.

While dark pools offer benefits like reduced market impact and lower transaction costs, they raise concerns about market transparency and fairness. Critics argue that dark pools can fragment markets and obscure true price discovery, potentially disadvantaging retail investors who lack access to these private venues. Despite these concerns, dark pools remain a critical tool for institutional investors seeking to execute large orders efficiently.