Traditionally, the exclusive locales for stock trades were exchanges such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and NASDAQ. In recent decades, cheaper and more powerful computer-based technology and at least two Securities and Exchange Commission (SEC) regulations helped give rise to an array of alternative trading venues, including a new type called "dark pools." Although it is sinister sounding to some, the "dark" appellation simply means that dark pools do not publicly display traders' buy and sell interests (quotes) as the traditional "lit" platforms do. This opacity attracted institutional investors (such as pensions and mutual funds), which became the pools' initial clients. Concerned about potentially harmful, market-moving information leaks about their intended trades, these big investors believed that the dark pools' concealed quotes helped reduce the riskiness of their trades. Securities regulators and state officials have raised policy concerns about the pools, as have Members of Congress in various committee oversight hearings. Such concerns include the impact of the pools on market quality, their lack of pre-trade transparency, transparency about whether the pools allow high-frequency trading (HFT), and to what extent they do so. This report explains what dark pools are, outlines recent developments of significance to the pools (including public policy and regulatory developments), and examines various current public policy concerns. Alternative trading systems (ATSs) can be subdivided into electronic communication networks (ECNs) and dark pools. ATSs broadly are broker-dealer firms that match the orders of multiple buyers and sellers according to established, non-discretionary methods. They have been around since the late 1960s and grew in popularity in the mid-1990s as technological developments made it easier for broker-dealers to match buy and sell orders. Their growth also benefitted from the SEC's 1998 adoption of a new regulatory framework, Regulation ATS (Reg ATS). Reg ATS sought to reduce barriers to entry for such systems while also promoting competition and innovation and regulating the exchange functions that they performed. An ECN publicly displays its best orders in the consolidated quote stream—as exchanges such as the NYSE and NASDAQ do—and allows their stock trade offers (known as quotes) to be accessed by investors. Over the last decade, ECNs have been widely perceived to have benefited the equity market through such features as faster trading technologies, innovative pricing strategies, and robust inter-market linkages. Two of the better known independent ECNs are INET and Archipelago. Other ECNs, such as BATS and Direct Edge, have merged with registered securities exchanges or have themselves become exchanges. The ATSs, including the ECNs, have collectively gained growing equity trading market share through the years. By various accounts, the competitive pressure from the ATSs, including the ECNs, has led legacy exchanges such as the NYSE to enhance the customer trading experience. Another kind of ATS, "dark pools," do not provide quotes into the pre-trade public quote stream as is generally required of trades on the NASDAQ, the stock exchanges, and ECNs. They publish trade data only after transactions occur. Some argue that post-trade disclosure is more informative. Generally, dark pools are said to merely indicate that the trade was executed off an exchange and do not identify themselves as the pool that executed the trade. Also, unlike NASDAQ and the exchanges, dark pools do not guarantee trade execution, which means that orders sometimes go unfilled. More specifically, when an investor places an order to buy or sell on a "lit" trading venue, the venue typically makes that quote available to the public. Within dark pools, however, traders often become aware of the existence of potential trading counterparties only after they have submitted their orders. Alternatively, a trader may signal to a limited number of traders who are also clients of a dark pool of their interest in either buying or selling a security. These "indications of interest" in dark pools are similar to the conventional quote on the lit exchanges but may display fewer elements of the trading interest. This pre-trade opacity initially attracted institutional investors that wanted to anonymously trade blocks of shares without triggering unfavorable price movements. There is a widely held view that rules adopted by the SEC in 2005, Regulation National Market System (Reg NMS), boosted the growth of the dark pools. Reg NMS was aimed at fostering competition among individual markets and among individual orders by promoting efficient and fair price formation across securities markets. Currently, there are about 40 dark pools that trade in domestic markets. Primarily trading NASDAQ- and NYSE-listed stocks, they now account for about 15% of the overall trading volume of such stocks. Dark pools have contributed to today's more fragmented equities market, which also includes about 11 exchanges and more than 200 broker-dealers that execute retail trades via their own stock inventories—a process known as direct internalization . Together, dark pools and internalization processes—both of which are generally exempt from requirements to display pre-trade quotes—constitute the bulk of what are alternately called dark trading, unlit trades, and off-exchange trading. By some estimates, internalization may account for about 60% of dark trades, whereas dark pools account for about 40%. Dark pools have also enabled the brokers who own them to charge traders a fee for access to the order flow in the dark pools. This practice is sometimes referred to as indirect internalization . In his book Flash Boys , Michael Lewis describes instances in which HFT firms that paid for access to dark pools preyed upon the pool's retail order flow, sometimes by front-running those orders. Front-running refers to the practice of trading ahead of a large order to benefit from the anticipated price movement that the large order will create. The most common example of front-running is when an individual trader buys shares of a stock just before a large institutional order to buy, which may cause a rapid, small increase in the stock's price. The trader can later sell the order back to the institutional investor or to the market at the slightly higher price. While certain forms of front-running are illegal, the legality depends on the circumstances of the situation. Dark pools have been divided into several structural subgroups, including Broker-dealer owned. Some large broker-dealers have created dark pools for their clients and at times for the benefit of their own proprietary traders. These dark pools reportedly derive their share prices from the broker-dealer's order flow. As a consequence, they are said to provide some price discovery. Examples reportedly include Credit Suisse's CrossFinder, Goldman Sachs's Sigma X, and Morgan Stanley's MS Pool. Broker-dealers dominate the dark pool business: Domestically, Credit Suisse Group AG, UBS, Bank of America Corporation's Merrill Lynch, Deutsche Bank, and Morgan Stanley own the largest dark pools. Agency broker or exchange-owned. These dark pools act as agents, not principals. The trades that they conduct are based on the security prices that derive from the exchanges. As such, they have no price discovery function. Examples of agency broker dark pools include Liquidnet and ITG Posit, while exchange-owned dark pools include those offered by BATS and the NYSE. Electronic market maker. These dark pools are affiliated with independent securities operators, such as Getco and Knight, which operate as principals for their own accounts. Like the aforementioned broker-dealer-owned dark pools, the transaction prices in pools are not calculated from the national best bid and offer (NBBO). As such, the dark pools do not materially contribute to price discovery. Economists perceive a mix of non-regulatory and regulatory factors to have played roles in boosting the popularity of dark pools, which reportedly grew from a share of about 4% of overall trading volume in 2008 to about 15% in 2013. Several of them are described below. There are at least five key non-regulatory factors: 1. A general fall in the level of market volatility. There is a perspective that when share price volatility is more pronounced, resulting in greater trading uncertainty, many large investors have greater interest in quickly and reliably getting their trades executed. This is widely seen as a particular advantage of NASDAQ and exchanges such as the NYSE. According to Justin Schack, managing director of Rosenblatt Securities, a financial firm that does market analysis, "When prices are really swinging around, traders seem to prefer the certainty of displayed-market price discovery and the generally more-robust technology on the exchanges to dark pools and other off-exchange destinations." By some measures, since about 2009, share price volatility has generally declined, helping to boost the demand for the anonymity of dark pool trading. 2. Potential t echnological m ishaps. Another catalyst in the shift to dark pools reportedly involves investor interest in avoiding technological mishaps that have occurred on the NASDAQ and large exchanges such as the NYSE—and avoiding HFT firms that trade on such lit platforms. 3. Low c omparative t rading f ees. Dark pools tend to charge lower fees for trades than do the NASDAQ and the exchanges. Relatedly, dark pool traders' total transaction costs tend to be lower than costs on exchanges in part because within the pools, large orders can be subdivided into smaller orders, potentially enabling simpler and faster execution. In addition, the pools often charge lower per-share fees than do the exchanges. 4. Trader a utonomy. Dark pools give traders comparatively more autonomy in the choice of the opposing buyers and sellers, potentially avoiding problematic traders, such as some allegedly predatory HFT firms. 5. Trade e xecution e fficiency. Dark pools can be a valuable execution tool for large orders as well as stocks, which may be more difficult to trade because they have wider bid-ask spreads or lower market liquidity.