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A man walks past an old Toronto Stock Exchange (TSX) sign in Toronto, June 23, 2014.Mark Blinch/Reuters

Something unusual happened in the trading of GMP Capital Inc. last week.

On Wednesday, 6.8 million shares in the small independent broker dealer changed hands – a 4,000-per-cent increase over the average. Usually when a stock shoots up on volume, there's a material event that would explain it. Yet on this particular day, there was nothing.

Oddly, the price of the stock didn't budge either. Conveniently, at the exact time an unusually high number of sellers were in the market, there was a correspondingly high number of buyers. Of the almost 600 individual trades, a mere 10 accounted for 93 per cent of the volume. The evidence points to one of GMP's institutional investors selling most, if not all of its position, to another institutional buyer, or buyers.

When an institutional investor needs to sell a huge "block" of stock in a relatively illiquid issue, the services of a human are typically required. A broker will try to line up a buyer and, in the process, hopefully avoid causing a material move in the stock. This time, most of the stock was sold electronically on Liquidnet Canada, a so-called dark pool.

Dark pools differ from traditional stock exchanges in a number of ways. Only a select number of investors are allowed in – usually of the institutional variety. When trades show up on a dark pool, the entire order often isn't visible, and the buyer or seller is anonymous. Investors, in a sense, are truly in the dark. The alternative trading systems, which were demonized by Flashboys author Michael Lewis for their opaqueness, account for roughly 30 per cent of all trading in the U.S.

Liquidnet Canada is one of the few dark pools that operate in Canada. It is a relative minnow with only about 0.3-per-cent market share compared to approximately 65 per cent for exchanges run by TMX Group Ltd. Liquidnet's platform suits a very particular type of trade: An investor who needs to either buy or sell a huge quantity of an illiquid stock, is extremely stubborn about price, is willing to walk if they don't get what they want, and doesn't want to get a broker involved.

"It's a brokerless market," Robert Young, chief executive officer of Liquidnet Canada, said in an interview. "An asset manager – a pension fund or mutual fund – will connect directly into the market."

On a traditional exchange, such as the TSX, traders always know which broker is offering to buy or sell whatever stock. On Liquidnet, a mutual fund could have a gigantic sell order on a stock and a trader might never know it's there.

"You could have a buyer and seller in there, but, because they are away on price or mismatched on size, they would never find each other," Mr. Young said.

Often, a buyer will only realize there's a big fish on the other end of a trade by nibbling away at an order. That appears to have been the case on GMP's giant day: 6.3 million shares changed hands in only 10 individual transactions over the course of about 90 minutes. Nine of those trades were done on Liquidnet.

The last sizable trade of the day was executed on the TSX by a broker.

Kevin Muir, an independent trader and a former institutional equity trader at RBC Dominion Securities Inc., said GMP's own traders likely determined who the seller of their stock was and then brokered the final piece of the order.

"I think that GMP found the seller and then they cleaned them up at the end," Mr. Muir said.

Being incognito on a dark pool comes with a price. If you have a huge position for sale, it may take time to unload.

"If you're a big seller, you kind of sit and you hope," Mr. Young explained. "We have a tremendous amount of unrequited orders in a day. People that have a buy, there's no sell. People with a sell, there's no buy."

Another downside of using a dark pool is speed – or lack thereof.

"For a name like GMP, I wouldn't be surprised if it was in there for multidays," Mr. Young said, adding that matching a buyer with a seller can all come down to luck.

"It's complete serendipity."

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
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TMX Group Ltd
-1.98%35.73

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