There are some broadly believed misconceptions about stock trading. One is that stocks only trade on exchanges. Increasingly, institutional and retail stock orders are being executed on private networks colloquially referred to as “dark pools.” For the first time, stock trading volume in dark pools now exceeds the volume of shares traded on U.S. stock exchanges. Although ‘dark pools’ sounds scary and ominous, their lower fees, reduced market impact, and anonymity have made them attractive venues for large institutional investors.
It is often said in the media that the market went up or down because there were “more buyers than sellers” or “more sellers than buyers.” These statements are incorrect, every share of stock that trades has a buyer and a seller, so the number of buyers and sellers always must be equal. It also represents a misconception that stock prices move predominantly because of trading.
Trading can impact stock prices, but news has a much bigger impact. Most economic and corporate news is reported outside of regular exchange trading hours. As the second chart shows, most of the gains in the market occur outside of regular trading hours, when fewer transactions are occurring.
The good news for investors is that off-exchange markets and the rapid reflection of new information into stock prices are signs of an efficient market becoming even more efficient. With commission-free trading, fractional shares, and multiple platforms to provide liquidity, investors are benefitting from the evolution of the stock market.