Dark pools are private trading venues where orders are matched without displaying quotes publicly, and they handle approximately 40% of all U.S. equity volume. They were created to let institutions trade large blocks without revealing their intentions — a visible order to buy 5 million shares would immediately move the price against the buyer. There are three types: broker-dealer pools (Goldman's Sigma X, Morgan Stanley's MS Pool), exchange-owned pools (NYSE's Arca Dark), and independent operators (Liquidnet for institutional block crossing). Dark pool trades are reported within 10 seconds but the orders themselves are invisible until filled.

Payment for order flow (PFOF) is the practice where market makers pay brokers for the right to execute customer orders — it's the business model behind zero-commission trading. When you trade on Robinhood, your order likely goes to Citadel Securities or Virtu Financial, who pay your broker roughly $0.002-$0.004 per share because retail flow is uninformed and profitable to trade against. These firms argue they provide price improvement — filling your buy at $100.01 instead of the $100.02 ask, saving you a penny. But PFOF revenues exceed $3 billion annually, meaning the value of routing rights far exceeds what's passed to customers.

The hidden market structure has profound implications. When 40% of volume trades off-exchange, lit exchange prices are formed with incomplete information — supply and demand that determines the NBBO only reflects the portion of interest that shows up publicly. This creates a free-rider problem: dark pools benefit from price discovery on lit exchanges without contributing to it. Research shows mixed results — some dark pool trading improves institutional execution, while excessive dark activity widens spreads on lit exchanges.

Regulatory scrutiny has intensified. The SEC under Gary Gensler proposed potential PFOF restrictions and mandatory order-by-order competition. In 2014, the NY Attorney General sued Barclays over its dark pool for misrepresenting HFT activity — resulting in a $70 million settlement. The EU's MiFID II implemented dark pool volume caps. For the average investor: use limit orders to maintain price control, understand your broker's routing practices affect execution quality, and recognize that 'free' commissions mean you're paying in other ways — through the spread and a market structure that monetizes your order flow.