Market devices and structural dependency: The origins and development of ‘dark pools’

‘Dark pools’ are private, electronic share-trading systems in which participants cannot see each other’s buy and sell orders. This article shows that the development of these material ‘market devices’ was strongly shaped by the structural dependency of their intended clientele (fund-management firms) on the big investment banks, particularly the indirectly monetary mechanism of dependency known in the US as ‘soft dollars’. The article’s underlying argument is that (a) the sociological analysis of financial markets requires bringing together the focus on materiality of, for example, actor-network theory with an emphasis on structural advantage such as that found in field theory; and (b) that both actor-network and field theory approaches could be strengthened by a stronger focus on mundane but important monetary mechanisms such as ‘soft dollars’.

Entangled Trading

Chapter 5 follows the investment chain from the ‘buy side’ of investment management into the ‘sell side’ of brokers and traders. It discusses the development of ‘dark pools’—private share-trading venues in which subscribers can bid to buy shares or offer to sell them without those bids or offers being visible to the market at large. Originally, access to dark pools was restricted to investment management firms, and the pools were intended to permit those firms to buy or sell large blocks of shares among themselves at low cost and without the ‘market impact’ of trading in the public markets. The history of dark pools, however, shows how hard it has been to cling to that vision in the face of investment chain entanglements. The entanglement on which the chapter focuses most relates to the ways of payments (colloquially known in the US as ‘soft dollars’) for sell-side research.