Dark Pool Trading To Gain Stock Market Edge


Simpler Trading Team

7 min read

In this article:

  • Hidden exchanges can affect retail traders
  • Rules for trading in the dark
  • Dark pool trading into the summer months

Is the “dark side” an option for trading this stock market?

Retail traders often struggle against the “big players” – such as institutional investors – and computer algorithms spread through all areas of the market.

Every edge that retail traders add to their toolbox presents an opportunity to take on the power players and their sophisticated market influences.

Enter the dark side, or rather, dark pool trading in the stock market.

(Check out the free video, above, for insight into trading this changing market.)

What is dark pool trading?

Dark pool trading is a non-public financial exchange that allows trading of securities in a private arena.

Dark pools, also known as alternative trading systems, allow placing orders outside public view and without requiring users to display the size and price of orders to others in the dark pool.

While still under watch by the U.S. Securities and Exchange Commission (SEC), regulations overseeing dark pools are more loosely regulated than public exchanges (which are open to retail traders).

Big players can use these trading systems to transact large trades without being subject to price action in the wider market. This can work for these institutional investors, but – like any trading – there are risks. These trades may not always deliver the expected best price for the investors.

The original purpose of dark pools when created in the 1980s was to allow trading in large blocks without these sizable transactions affecting the markets. According to a recent listing by the SEC, there are dozens of alternative trading systems.

The idea behind dark pools was an avenue for institutional investors – such as pension funds and mutual funds – to trade with liquidity and discounted commissions. These “big players” are able to make trades with limited exposure until after the trade fills. The transaction is hidden until completion.

For retail traders, these non-public trades can pose added risk. For example, retail traders could buy stock without knowing an institution is working a trade at the same time in the dark pool and causing a price difference that negatively affects the retail trader operating publicly.

This alternative system has been controversial as retail traders feel manipulated without their knowledge.

Do dark pools have rules?

Dark pools are regulated trading exchanges monitored by the SEC.

Even in the dark, institutional transactions must follow established rules. Two key rules are:

  • Stateside reporting – Any dark pool trade placed in the continental United States must be reported within three hours.
  • Foreign reporting – Any dark pool trade placed outside the continental United States must be reported within 24 hours once the trade is filled.

The rules may not seem like much help to retail traders, but these trades can be followed.

Do you want to trade with a professional?

This stock market has presented some testy waters for retail traders, especially those looking for a way to trade with a professional.

Simpler Trading put together an online community like never before – a free trading room. This online training chatroom is designed to allow traders to experience the insight from a professional trader during live market hours.

There is no cost to join, and this opens an opportunity to meet our team of traders working to share what they experience daily as stock market retail traders. Learn more today.

How do dark pools affect trading?

Despite the name sounding like the enemy of the people, dark pools can be an asset for retail traders.

Retail traders have always faced a tough environment in the stock market. Aside from any “big players” working against them, trading is a risky endeavor.

Most traders today at best have a casual understanding of these alternative systems. Many traders learned more about the plight of retail traders from the “us against them” trading short squeeze scenarios surrounding AMC and GameStop in early 2021. These exposed more publicly how the markets can be considered unfair to the smaller players.

Traders can use dark pools in a similar way retail traders tracked institutions holding onto AMC and GameStop.

If the big players are working these dark pool deals, why not follow these hidden moves to gain an edge?

How to Use Dark Pools in Your Trading…

One of the Simpler Trading team members, Kody Ashmore, Director of Weekly Options Strategies, targets dark pool trades on a regular basis.

“Traders need to understand that dark pool prints are just a price level, or print, that is noted by significant volume, and they are only accessible on private exchanges,” Kody said. “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.”

The goal, according to Kody, is to turn the unfair advantage of dark pool trading into an edge for retail traders.

The key is knowing how to “read the tape,” i.e. track market moves that indicate dark pool trading activity showing up in the public arena. Tape reading can be more complex for some traders. The process involves watching stock ticker price movement without relying totally on stock charts while working to anticipate more immediate results in market prices.

Kody adds institutional volume in his stock charting setups, and feels this gives him an edge in this market. Kody doesn’t try to search all over the internet for this information. He spots dark pool activity by using a scanner specific to these trades, such as the Cboe Options Exchange LiveVol Earnings Analysis.

Dark pool trading can reveal potential setups, and right now Kody is watching potential activity in UPS, ETSY, and XOM.

Kody follows a critical routine when trading in dark pools:

  • Find the late prints (price levels by volume on alternative systems)
  • Find the setup to understand which direction to trade the stock

This predetermined routine helps Kody gather important information on potential stock direction… thanks to dark pool trading.

“It doesn’t matter your trading style or your trading strategy,” Kody stated. “Dark pools can be a great place to gather information.”

Dark pools into the summer months

The summer months historically tend to slow down with trading activity for the stock market, ie. less volume and lower volatility.

This environment happens as traders, like many people, take time off for summer excursions and slow down or halt trading activity. This can create a range-bound market that typically moves along without big shifts.

That may or may not be the case this summer with continued inflation, economic struggles, and unknown events like foreign conflicts that could jolt the market at any time.

Market action Wednesday kept traders guessing throughout the session as tickers opened positive, tried to rebound, and then settled into the close for another down day.

The Dow closed at 32,813.23 points to fall .54% (dropping 176.89 points on the day). The Nasdaq dropped to 11,994.46 points for a .72% stumble while the S&P 500 dropped .75% to 4,101.19 points.

This see-saw action could be the range until fall. Until something serious economically or heavy dark pool volume piles into the mix, Simpler’s traders know to take this summer one market session at a time.

Managing risk and protecting capital are the goals until the market reveals a sustained trend.

Why trade alone against dark pools?

Trading requires learning skills and diligent research, and at Simpler Trading we understand the time commitment to trade well.

We started the Simpler Options years ago to help traders find out more about who we are in the world of trading.

Try this online training and trading chat room today and get access to pro-level traders with decades of real-time market experience.

Market forces alternative strategies

When the market is in a state of gaps down and rips higher, traders need to find alternative strategies to combat the uncertainty.

Knowing market direction is valuable when navigating the shifty market today. Using dark pools as insight into market movement places a new tool in the hands of retail traders searching for an edge.

Dark pool trades may be hidden from public view, but developing a strategy to track these trades and analyze market movement is invaluable.

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