Market Microstructure — OTC and Dark Pools
Definition
Market microstructure is the plumbing question behind any flow-based signal: on which venue did this trade happen, and who took the other side? Two answers matter most — a large share of volume never touches a lit exchange, and the counterparty is either a discretionary dealer or an obligated market maker.
Core Ideas
Global equity turnover, roughly
| Market | Average daily turnover (USD) | Structural character |
|---|---|---|
| 🇺🇸 United States | $500bn – $1,000bn | Largest in the world; highly developed high-frequency trading and dark pools |
| 🇨🇳 China (A-shares) | $110bn – $165bn | Second largest; retail supplies most liquidity; no dark pool mechanism |
| 🇯🇵 Japan | $45bn – $61bn | Asia’s most mature market; foreign and institutional money dominates |
| 🇬🇧 United Kingdom | $5bn – $7.5bn (on-exchange only) | OTC and dark-pool share is very high, often over 50% |
The UK row is the point of the table: the on-exchange figure understates the market badly when most trading happens off it.
OTC (Over-the-Counter, 場外交易)
Trading done directly between two parties rather than through a public exchange.
- Mechanism — the two sides negotiate by phone, network, or a dealer network, quoting and agreeing directly.
- Non-standardized — quantity, price, and settlement terms are freely customized between the parties.
- Low transparency — trades need no immediate public disclosure; prices are not openly visible.
- Broad coverage — beyond unlisted equity, the overwhelming majority of global bonds, foreign exchange, and derivatives (options, swaps) actually trade OTC.
That last point is what connects OTC to the options work: exchange-listed option chains are the visible part of a much larger derivatives market.
Dark pools (暗池)
Anonymous private trading venues built for institutions, usually run by large investment banks (Goldman Sachs, Morgan Stanley) or independent operators. They run alongside lit exchanges; the defining property is concealment.
- Mechanism — institutions submit orders into the pool. The order book is fully hidden — nobody, including other participants, can see intent, price, or size before a match. Only after a fill is the data reported to regulators.
- Why they exist
- Avoid market impact. A mutual fund selling 5 million Apple shares on a lit exchange triggers panic and drives the price down. In a dark pool the order matches quietly.
- Lower transaction cost. Institutions complete large blocks at more stable prices.
- Risks
- Damages price discovery. When a large share of volume moves into the dark, lit prices may stop reflecting true supply and demand.
- Retail disadvantage. Individual investors cannot access dark pools and never see the prices institutions match at.
Dealer versus market maker
All market makers are dealers, but not all dealers are market makers. Both trade their own inventory; the obligation and the profit engine differ.
| Dealer (交易商) | Market Maker (做市商) | |
|---|---|---|
| Obligation | None. Trades only when it wants to | Mandatory. Must quote both sides continuously, even in a crash |
| Trading style | Directional or selective — trades when it sees profit | Passive and continuous — takes the opposite side of whatever the public wants |
| Primary profit | Capital gains — buy low now, sell higher later | The bid-ask spread — capturing the small difference between the two quotes |
| Holding period | Variable — days, weeks, or months | Ultra-short — flip immediately to avoid inventory risk |
This table is the foundation under Gamma Exposure and Dealer Positioning. The assumption “dealers are the customer’s counterparty” is only reasonable because of the market maker’s quoting obligation — they must take the other side, and their spread-capture business model means they hedge rather than bet. A discretionary dealer would offer no such guarantee.
Relationships
- Gamma Exposure and Dealer Positioning — the counterparty assumption that GEX rests on, and why the quoting obligation makes it work
- Open Interest and Volume — market makers as the reluctant carriers of overnight open interest
- Quantitative Trading — execution venue and market impact as strategy constraints
- Derivatives Pricing — most derivatives trade OTC, priced by replication rather than by an exchange quote
- Bonds and Fixed Income — bond markets are overwhelmingly OTC
- Trading & Finance