Dark Pool Trading
Dark pool trading may sound mysterious, taboo, and pretty awesome to the average trader. But, when dark pools were created, that wasn’t the reputation it wanted to garner. However, dark pool trading is an incredible and effective trading strategy, but there’s nothing mysterious or taboo about it; it’s a lot less dramatic than traders think.
The purpose of dark pools was to allow institutions such as pension funds and mutual funds to transact trades with discounted commissions and available liquidity. As of late, dark pools seem to have been in the eye of the retail trader & public. The increase in attention may have started after the AMC and GameStop shenanigans, as it shed some light on how the markets can be unfair. The dark pool exchanges have been quite controversial as it leaves the retail traders feeling like they are being manipulated. In all honesty, they should feel that way.
What is the Dark Pool?
The dark pool is a private exchange for trading securities. It allows institutional investors to trade without exposure until after the trade has already been filled. What does this mean? It means that an institution can hide its trade until it’s filled. In layman’s terms, you could be buying a stock without knowing that there is an institution right above you, selling the price lower. I’ll show some examples shortly; the concept can be easier explained visually.
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Video Guide to Dark Pool Trading
Are Dark Pools Legal?
I get asked quite often if dark pools are legal. The crazy answer is yes, absolutely. Dark pools might be controversial, but it is a regulated trading exchange authorized by the Securities and Exchange Commission (SEC). When an institution places a trade in the dark pool exchange, two rules must be followed once both parties have fulfilled the transaction.
If the trade was placed in the continental United States, the transaction must be reported within three hours.
If the trade is placed outside the United States, for example, in London, they have 24 hours to report it once the trade is filled. You can see an example of how that looks when reported in the graphic below.
As you can see in the chart above, there are three areas of focus that traders need to be mindful of: quantity of shares, price, and market. For the quantity section, you can see that 251,292 shares were traded for $412.0696. However, you can see in the market those same shares were going for different prices in the public market.
What does that mean? It means the trades that were going for $412.0696 were transacted the prior day and were reported the next day. That’s why rule two is so applicable to dark pool traders, as it could throw them off seeing such information.
How to Use Dark Pools in Your Trading?
I use dark pool information in two different ways. Traders need to understand that dark pool prints are just a price level that is noted to be significant volume, and they are only accessible on private exchanges. My first step with dark pool information is to locate where all the late buy/sell prints are. These prints are a clear indication of how the market will go about 90% of the time.
Let me take a moment to cover late prints. There are late buy prints and late sell prints. They happen every day, and the larger the print size for the day, the greater the price movement is. The share size is always the same. All indices have a specific share size, but the main one I follow is the SPY.
The SPY signature share size is either:
The share size for the SPY used to be:
The SPY then started dividing the share size in half. However, traders need to be aware that anything above 10+ million shares is worth noting, and if you get three days in a row of 10+ million, you can get a pretty good move in price. Once you identify the late prints, it is deemed a “buy or sell” print-based off if we closed above or below.
Once I’ve located all the large buy/sell prints, I want to take trades on the path of least resistance. For example, if several levels of large late sell prints are above the current price, I want to be short of the market. With that example of wanting to be short of the market, I look for setups that fit my bias toward the late prints. In this case, I need to be short.
In this example, Abbott Laboratories (ABT) is in a bear flag formation chart that shows a swing low, and the consolidates go higher. Once I find a setup I trade, I then use LiveVol to look through the history of where all the large volume has occurred. This tells me that the trend, pattern, and institutional volume complement each other, showing that I have a high probability setup.
Though institutions that trade in the dark pools have an unfair advantage, you too can have an unfair advantage in your trading if you know how to read the tape. It doesn’t matter your trading style or your trading strategy; dark pools can be a great place to gather information.
If you add the institutional volume to your setups, I believe you can have a massive edge in this market.
If you’re considering trading in the dark pool, here’s my most crucial routine:
- Find the late prints
- Find the setup to understand which direction to trade the stock
Dark pools can give you great information on where the direction of a stock will go. However, if you are looking for a mentor to guide you in your trades, but don’t know where to start. I would urge you to sign up for the Simpler Free Trading Room. Sign up today and trade along side experienced professional traders who can guide and mentor you in your trading career. Why trade alone when you can trade with us?
FAQs on Dark Pools Trading
A: No, dark pool trading is not illegal. It’s regulated by the SEC.
A: You can look on the internet and try to conduct your own research, but the easiest way is through a scanner such as Livevol.
A: Dark pools are regulated by the SEC, to ensure that privately placed trades are in compliance.
A: At Simpler Trading, we use indicators from 4 categories: volume, volatility, momentum, and trend.
A: Tape reading is the ability to look at the numbers on tape, without looking at charts and be able to predict the immediate outcome in the market prices