Wall Street’s Shadow: The Secrets of Private Rooms and Phantom Liquidity

It’s easy to assume that stock trading mainly takes place on venues like the New York Stock Exchange (NYSE) or Nasdaq, where all bids, offers, and order sizes are transparently displayed in real time. In reality, however, a substantial portion of today’s financial markets—especially large block trades—are executed away from this public gaze. The primary stage for this activity is the “dark pool”.

A dark pool is an off-exchange stock trading platform that does not display quotes or order sizes before trades are executed. Formally, it is classified as an Alternative Trading System (ATS) and is overseen by the U.S. Securities and Exchange Commission (SEC). The core rationale for dark pools is to prevent adverse price moves when institutional investors and others trade large blocks of stock. If a large buy order becomes public, prices can spike; if a large sell order leaks, prices can plunge. Dark pools are designed to hide this information in advance. The name comes from this “darkness” of trading, which can make them feel like part of the financial underworld, but they are very much a trading mechanism within the regulated system.

Roughly a decade ago, dark pools were the focus of intense regulatory scrutiny and enforcement actions over alleged preferential treatment for high-frequency trading (HFT) firms. Now, according to a recent Bloomberg article, they are evolving into an even deeper shadow. At the center of this shift is a new type of trading venue known as the “private room.” It signals that Wall Street’s opacity has reached a new stage, while also raising fundamental questions about market structure and liquidity.

According to the article, private rooms are, quite literally, “invite-only” and “gated” trading spaces carved out within existing dark pools that only selected participants can access. Each room operates independently, and outsiders who are not invited may not even know it exists. This goes beyond simply hiding trading intent: its defining feature is exclusivity—the ability for traders to handpick “who they trade with”. David Canizzo of Raymond James likens it to “knowing exactly what you want to buy, from whom, and where, instead of going to Walmart on Black Friday,” describing it as “controlling the terms of the trade.”

These private rooms are being rapidly adopted by a wide range of market participants, including broker-dealers, market makers, hedge funds, and asset managers. The current backdrop is particularly fertile: more than 50% of all U.S. equity trading now occurs off-exchange, meaning that over half of activity takes place away from lit venues. In this environment, private rooms are thriving. At IntelligentCross, an ATS operator based in Stamford, Connecticut, estimated volumes in its private rooms—also referred to in the article as “hosted pools”—have grown so large that they exceed the combined total volume of nine competing dark pool operators. Jatin Suryawanshi, global head of quantitative strategy at investment bank Jefferies, estimates that about 15 out of every 100 shares executed by the firm’s algorithms are traded through private rooms.

So why do market participants prefer even more closed-off private rooms on top of already opaque dark pools? Roman Ginis, CEO of the parent company of IntelligentCross, explains the core reason as “controlling the liquidity a broker interacts with to achieve better execution quality.” For example, there is demand to selectively trade with market makers that handle retail flow—orders from individual investors that tend to have less price impact—while avoiding other institutions that react quickly to market prices or high-frequency traders with informational advantages. By doing so, participants can reduce the risk of immediate adverse selection and price moves.

The experience of CastleOak Securities, a New York–based boutique brokerage, clearly illustrates this selective use. Carlos Cabana, head of equities sales and trading at the firm, uses a private room offered by ATS operator OneChronos, which he calls the “Diversity Pool.” Only about 10 boutique brokerages that meet specific criteria—such as ownership structure and investment objectives—are allowed to participate, and CastleOak prioritizes trading with them. Cabana likens it to “a party where only invited guests can attend,” and says that thanks to this pool, OneChronos has become the firm’s third major trading venue, after NYSE and Nasdaq.

Private rooms are also an attractive alternative for smaller firms that cannot shoulder the substantial costs of building and operating their own ATS or single-dealer platform (SDP), along with the complex regulatory reporting requirements and network connectivity they entail. Steve Miel, CEO of the parent company of ATS operator LeveL, explains that by leveraging their existing infrastructure and networks to offer these capabilities, ATSs can “lower the barriers to entry and help firms cut unnecessary overhead.” Private rooms are spreading under various labels, including “hosted pools,” “restricted-access rooms,” “ATS pools,” and “custom counterparty groups.”

Behind this greater efficiency and control lies criticism that private rooms can seriously undermine transparency in the market as a whole. The biggest concern is the worsening of the “phantom liquidity” problem. Trades executed inside private rooms are simply added to the total reported volume of the parent dark pool that hosts them. This means that when market participants assess the liquidity available in a given dark pool, the figures they see include volume in private rooms they cannot access. That can lead to a distorted view of true market depth.

More broadly, the proliferation of these closed venues is fueling concerns about increased fragmentation, as markets are carved into ever smaller pieces. ATSs operate under SEC oversight and must provide an overview of their operations through a public disclosure form known as ATS-N. While this form may indicate whether private rooms are in use, the terminology and level of detail vary widely, and in many cases it is difficult to tell how many rooms exist or who participates in them. Larry Tabb of Bloomberg Intelligence notes that under current rules, ATSs are not required to separate out volumes for their open pools versus private rooms, nor to distinguish trades that use “segmentation strategies” targeting specific client groups. This makes it extremely difficult for analysts and investors to gauge the market’s actual liquidity.

About ten years ago, dark pools came under intense media and regulatory scrutiny over transparency issues, including allegations of preferential treatment for high-frequency trading firms—controversies partly ignited by Michael Lewis’s bestseller Flash Boys. When Bloomberg asked about the spread of private rooms, officials at the SEC and FINRA declined to comment.

Not all ATSs are rushing to embrace private rooms. Armando Diaz, CEO of New York–based ATS PureStream, says that when a pool is created on his platform, it is visible to all subscribers and open to anyone to join (so far, there have been no requests and volume is zero). He warns that private rooms that are not open to all subscribers could raise regulatory concerns, arguing that “the more control a host (the room creator) has over a room, the closer it gets to effectively operating an ATS, and the greater the regulatory risk becomes.”

From a user’s perspective, however, private rooms are seen as a useful tool. According to the article, trades in private rooms generally aim to execute at the midpoint of the National Best Bid and Offer (NBBO), and if an order does not get filled in the room, it can be routed out to the broader ATS. At IntelligentCross, private rooms accounted for an average of about 5.4% of volume last year. OneChronos says its share is currently below 5% but is “in growth mode,” with “rising interest from both retail and institutional brokers.” LeveL declined to provide specific figures, citing the lack of industry-standard classification. Mark Gulyas of AllianceBernstein says up to 75% of the firm’s trading takes place off-exchange; while private rooms still represent a small portion, he expects their share to grow, calling them “innovative and here to stay” and adding that “a lot more is happening there than most people realize.”

The “private room” phenomenon on Wall Street, dissected in detail by Bloomberg, reveals a complex facet of modern financial markets. For certain participants, these venues are viewed as innovative tools that offer clear benefits: control over trading counterparties, lower costs, and improved execution efficiency. At the same time, they carry serious risks: further undermining market-wide transparency beyond that of traditional dark pools, exacerbating the problem of phantom liquidity, accelerating market fragmentation, and making regulatory oversight more challenging. The article’s criticism of inadequate disclosure only amplifies these concerns. Ultimately, the spread of private rooms is another example of the constant tension between efficiency and transparency, and suggests that this “shadow within the shadows” warrants sustained attention and in-depth debate over its long-term impact on market structure.

What we should think more deeply about is that, for now, private rooms help make trading more efficient for the direct counterparties, but they actually undermine the efficiency of the overall market. And if more and more counterparties keep increasing the share of their trades executed in dark pools and the private rooms within them in pursuit of “efficient trading,” to the point where they account for a majority of total activity, will the system still function as originally intended?