June 19, 2024 9:56 AM

What is anonymous trading and why some people prefer it?

Many investors opt for anonymous trading, but what does it mean to invest anonymously? How do such anonymous transactions occur and what advantages does it offer to those who choose it? Read on to find out more about this key strategic option for investors, and to understand this trend in financial behavior, to know if it is right for you or your company whether here in Canada or abroad.

/ Published 4 years ago

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Some high-profile investors opt for anonymous trading for privacy reasons or to protect their personal interests such as family. Some stock exchanges, including London Stock Exchange, NASDAQ and Toronto Stock Exchange, offer this type of option for investors.

Most investors that opt for this option are the high rollers, as they want the freedom to have major investment without getting much attention from most people.

How does anonymous trading work?

Investors can trade anonymously in two different settings—anonymous exchanges and dark pools. Anonymous exchanges were eventually allowed due to competition from electronic communication networks. Some stock exchanges allow traders to order both anonymously and non-anonymously. Meanwhile, dark pools operate outside of regulated national exchanges, which means that orders made through this venue would only be anonymous before and during the execution instead of after execution.

Dark pool trading also allows for searching or posting liquidity, but the traders have the option not to print the trades on acknowledged exchanges.

Most transactions for anonymous trading are more strategic than non-anonymous ones because these are usually executed by specialists and market participants. Apart from a more strategic execution, anonymous trading usually involves larger trades, according to a research published in the Journal of Financial and Quantitative Analysis.

What is the advantage of investing anonymously?

The research also found out that anonymous trading could help reduce execution costs when used in a more calculated manner—which is often the case because as mentioned, these types of trading are usually done by market makers. When done in a random order, anonymous trading does not help reduce execution costs.

Apart from personal privacy, some investors prefer anonymous trading because they do not want to get noticed, according to Advisor. Most of these investors choose to work with smaller industries where a certain high-volume trade is made, it easily gets noticed. These investors want to protect not just their identity but also their strategy.

Such investors always run the risk of having their intentions noticed, copied, or undermined. For example a savvy trader might spot a deal going down, outbid the offer by a penny or two, then sell it back for pennies more. Knowing the larger company or investor is willing to pay means they can leverage it for their gain, and the bigger investor’s loss. Thus it is no surprise many seek to engage in anonymous trading.

These investors usually work with firms on their behalf, having the option not to be specified in the printed order. This is particularly useful when trading on a lit board where anyone can see a specific firm that has traded a stock.

anonymous trading
Anonymous trading may not be for everyone but the protection it provides is undeniable. (Source)

Who should be interested in anonymous trading?

Ultimately is up to the investor to maintain the certain degree of their anonymity. If they do not want anyone to know that they are trading for specific stocks, they must not tell other people the firms that they are affiliated or doing business with, as these firms are usually the ones publicly listed.

Anonymous trading may not be for everyone but the protection it provides is undeniable. People with money to trade should have the freedom not to be identified for security reasons and not for fraudulent intent. In a political climate where people usually judge other people about everything they do—both personally and professionally—anonymous trading helps prevent drama.

For instance, an investor may not wish to be associated with the oil and gas industry, but this person sees opportunities in these industries—anonymous trading could help that person to keep his or her business private. Whether it is in their personal or professional lives, people do not just deserve, but they also have the right to their own privacy.


(featured image from pikrepo)

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