What Is a Sunshine Trade?

A sunshine trade is a high-volume transaction prematurely revealed to the market via a public announcement before the order is even entered.

A sunshine trade will cause a move in the market to occur simply due to the size of the position being taken, but this strategy can help minimize potential negative ramifications. If the parties involved reveal some or all of the specifics of the trade in advance, the market can readily prepare itself for the outcome, rather than this transaction causing a giant ripple in the market place.

Key Takeaways

  • A sunshine trade is a high-volume transaction prematurely revealed to the market via a public announcement before the order is even entered.
  • Sunshine trades are meant to reduce confusion and speculation by investors by making large transactions more transparent and reducing any negative ramifications on the market.
  • By preannouncing their expected trade, investors may be able to realize lower transaction costs. A sunshine trade announcement can also alert and attract other investors and interested parties who might not otherwise have been paying attention.

Understanding Sunshine Trades

A sunshine trade is one that is done in an open and transparent manner, with full disclosure by the parties involved in the planned trading activity. Sunshine trades are meant to reduce confusion and speculation by investors by making large transactions more transparent. This transparency leads to markets which are considered more reliable and fair.

By pre-announcing their impending or upcoming trade, investors planning to make a large trade may also be able to realize lower transaction costs. An announcement of the intent to trade can also alert and attract other investors and interested parties who might not otherwise have been paying attention. This in turn can help level out and stabilize the impact on the marketplace.

The term “sunshine trade” might be meant to convey the idea of shining light on the trade, and not performing the transaction in the symbolic darkness of a dark pool trading environment. The term may also be inspired by the concept of sunshine laws, which are a set of rules that require certain meetings and other proceedings of government agencies, boards, or other entities to be conducted openly and accessible to the public.

Sunshine Trades vs. Dark Pool Trading

The opposite of a sunshine trade would be dark pool trading, where most traders do not know who is trading or the size of the transactions. Dark pools may sound mysterious, and in many ways, they are. These are private exchanges in which investors trade securities in their own sequestered forum, in an area not accessible to the general investing public.

A common trading platform that has been around for decades, dark pools involve their share of potential pitfalls. The problems mainly stem from the lack of transparency in this trading venue. Specifically, dark pools can present the possibility of conflicts of interests, and can also create conditions that allow predatory trading practices by high-volume traders.