Order Matching: The Difference Between Dark Pools and Exchanges

Most of us are familiar with traditional exchanges, however, trading actually occurs through various venues, each offering unique advantages and challenges. 

Today we are comparing traditional exchanges with another primary trading venue: dark pools. 

We cover the important distinctions, breaking down how order matching operates in both environments.

To start us off, let’s define exchanges, dark pools, and order matching. 

What are exchanges?

Exchanges, like the New York Stock Exchange (NYSE) and NASDAQ, are centralized marketplaces where buyers and sellers come together to trade securities. 

These venues have a solid reputation for transparency and regulation. They are well-known globally, attracting millions of traders and investors each day. As a result, they feature high liquidity and participation. 

Beyond trading, they can provide services like market data dissemination, clearing and settlement, and listing services for companies seeking to raise capital. 

What are dark pools?

Dark pools are private trading venues where large orders can be executed anonymously. 

While they provide significant benefits which we explore in the next chapters, there is less regulation, which creates side effects concerning transparency and fairness. 

What is order matching?

Order matching is a process where buy and sell orders are paired together in a trading venue (like an exchange or dark pool) to execute trades. This system ensures that trades are conducted efficiently and fairly, matching orders based on specific criteria.

To help make the next section easier to digest, we will also include a quick definition of order books here, as this is a key difference between the two venues. 

An order book is a digital list of buy and sell orders for a specific security. It provides a real-time view of market supply and demand, showing the quantities of orders at various price points. The order book is used to match the buyers and sellers. 

Order matching on exchanges vs dark pools

Now that we have the foundations down pat, let’s explore how order matching differs between exchanges and dark pools. 

Exchanges

Exchanges use a centralized order book, where buy and sell orders are matched based on price-time priority. This means that orders are matched by price first and, if multiple orders have the same price, by the time they were entered. 

The order book on an exchange is publicly visible, allowing traders to see the current bids, offers, and recent trade prices. 

Dark pools

Unlike traditional exchanges, dark pools use internal, private order matching systems.  

Although there is less transparency, this anonymity helps prevent large trades from causing sudden price changes. For example, if a large buy order appears, people might think the price will go up and start buying too, driving the price higher. 

This anonymity is particularly beneficial for institutional brokers and firms that manage large portfolios.

Key differences

	Exchanges	Dark pools
Transparency	Public order books with transparent order matching.	Private and anonymous order matching processes.
Price discovery	Big influence due to visible supply and demand	Limited contribution due to lack of public visibility.
Impact on market	Visible large orders can trigger large price movements	Minimal impact due to anonymity
Regulatory oversight	Subject to very strict regulatory oversight.	Less regulated, depending on jurisdiction

Conclusion

Order matching is central to both exchanges and dark pools. As we have learned, the major difference is publicly visible trading vs private and anonymized trading. The benefits of dark pools cater to institutional investors and brokers, allowing them to execute large trades with minimal market impact. 

Devexperts has developed DXmatch, a turnkey order matching solution, ideal for both traditional exchanges and dark pools. It focuses on speed, scalability, and security, providing brokers and investors with absolute peace of mind when conducting large-volume trading. 

Set up a product tour of DXmatch for your firm, or chat with our team in more detail about dark pool and traditional exchange solutions.