Exploring hidden trading practices: Dark pools and market manipulation!

So now the question is, why do these dark pools exist?

This gleaming and dazzling world of finance is has been captivating investors attention for decades now. But there are undiscovered paths ahead. Today, let's explore the tunnel that leads to understanding dark pools and how markets can be influenced.

So, imagine you want to sell something, like a toy and you tell everyone around you that you're selling it. After hearing this lots of people want to buy that toy from you. They start offering you different prices, and the more people know you're selling it, the higher the price they might offer.

Now replacing the toy with stocks, something similar happens. When investors want to buy or sell stocks they usually do it on stock exchanges (BSE/ NSE) which are like big marketplaces. When they place their orders on these exchanges, it can affect the stock's price because others see these orders and might change their own orders based on that information.

But, what if someone what's to keep their trades a secret? Here comes in the concept of dark pools. Imagine if there was a undisclosed location where you could sell your goods quietly without announcing it to everyone. In the same way, dark pools are like secret trading rooms for big investors. These are private places where large investors can buy or sell big amounts of stocks without everyone knowing.

So now the question is, why do these dark pools exist?

They are used for big trades that could cause a lot of chaos if done in public. Let's say a big investment company wants to buy a huge number of shares in a company. If they do it openly on the regular stock exchange, the news will disseminate and other investors might start buying too, causing the price to go up before they finish buying all the shares they want. This sudden fluctuation in price might  cause a volatile situation for the company.

Hence, in a dark pool they can quietly buy the shares without causing a big price jump.

But, there's a catch. Since these dark pools are private and not as transparent as the regular stock exchange some people worry that they might be used for bad things. For example, someone could manipulate the market by secretly buying or selling a lot of shares in a dark pool and making the stock price go up or down, which could hurt other investors.

The regulatory aspect plays a significant role in managing the potential risks associated with dark pools, shall discuss same in part 2 of dark pools and market manipulation.