Dark Pool Trading

Dark Pool Trading Explained

Have you heard of dark pool trading? The stock market is dynamic and vast. Each component works harmoniously to create a financial ecosystem in which investors and traders can participate. There are billions of dollars floating around in this marvelous creation. As a result, there are a lot of aspects of the financial markets that one has to understand to master the art of trading and investing. One such aspect is dark pool trading. 

Now, you may wonder what dark pools exactly are. In this article, we’ll discuss and introduce you to dark pools and explore everything there is to know about them! So let’s get started!

Dark Pool Indicator

On the charts here we see the bright blue dark pool indicator which shows the hidden hand behind the stocks in each window.

To understand dark pool trading, we need to know what it is. Dark pools, or black pools, are privately organized and managed financial exchanges for trading securities. These dark pools aren’t accessible to the general public. Therefore, they are unknown to retail and general investors.

In other words, dark pools allow big institutional investors to sell and purchase large amounts of securities with complete secrecy and no disclosure until their trades have been executed. This is also known as block trading. These dark pools allow large institutions to execute trades with gigantic quantities and offer them a discreet way to trade.

Why Were Dark Pools Created?

Why were dark pools created? Because big institutional investors needed privacy while trading large block orders. 

Large institutions needed privacy to trade large block orders. As a result, dark pools were created. Dark pools are also known as dark pools of liquidity.

When trading huge block orders, institutions wanted to avoid impacting the markets. Hence, dark pool trading was born. Investors trading many securities on regular exchanges would move markets.

Those huge trades would impact prices greatly. As a result, we’d have huge volatility. They allowed institutions to trade large orders without impacting the prices. 

More than fifty dark pools are now registered with the U.S. Securities and Exchange Commission. Dark pool trading is different than being a market maker

The origin of dark pools dates back to 1979. They decided to change financial regulations in the US. As a result, securities listed on one exchange could trade elsewhere. They no longer had to trade only on the exchange to which they were listed.

This new regulation allowed dark pools to emerge throughout the 1980s. This allowed institutional investors to trade large block orders and avoid impacting the markets.

This gave them privacy and a method to trade in large quantities without exposure. As a result, dark pool trading was born. It’s good that volume isn’t affected.

Dark Pool Trading Example

Dark Pool Trading SPY

Here, we see the recent dark pool trades placed on $SPY – the horizontal blue lines show the price the trades were placed at and the date and time.

Avoiding Market Impact

Since the inception of dark pools, institutional investors and funds have easily moved big block orders. This results in avoiding impact on the markets and prices.

And with the modern convenience of electronic trading platforms, creating dark pools is easier and more flexible. Private organizations mainly manage them.

These financial forms are an exchange for trading in enormous quantities of securities. However, they’re not accessible to the general public. 

Have you heard of Flowtrade, however? If you want to look into using dark pool trading to your advantage, check them out. Check out our Flowtrade review and learn how to get a free Bullish Bears membership through them.

Purpose of Dark Pool Trading

  1. Dark pools are built to cater to and provide additional liquidity and secrecy to big players trading huge blocks of securities.
  2. Dark pools allow big institutions to place large trades to avoid impacting the markets and prices.
  3. Any number of securities can be easily sold or bought away from the eye of the general public.
  4. Dark pool participants don’t need to disclose their trades until executed and finished.
  5. Dark pools allow institutions to cover their strategies and plans.
  6. They’re able to execute their trades without letting anyone know. 
  7. And it easily ensures the sale and purchase of any number of securities.

Types of Dark Pools

One might think there’s a single type and category of dark pools. In reality, there are three different types of dark pools. 

As a result, we will dig into each one and understand how dark pool trading works. Then, you can make an informed decision about how a tool like Flowtrade would benefit your trading. 

Dark Pool Trading Example

Recent Dark Pool Trades hitting our scanner. Read more about this over at our FlowTrade Review.

Agency or Exchange Owned

Public exchanges and agencies set up these dark pools. They allow their clients anonymity and secrecy while executing their orders.

These dark pools act like agents. It’s a way for the institutions to access these dark pools easily. Then, they’re able to execute their trades and access high liquidity.

Broker-owned dark pools are created by brokers themselves for their clients. These dark pools allow the big players a unique and anonymous trading method.

The prices are derived from the order inputs and flow. As a result, the clients of these brokers are allowed access to dark pools.

As a result, the execution of their high-volume trades is done in complete secrecy. These brokers may also cater to proprietary traders.

High-Frequency Trading

Electronic market dark pools are also like broker-owned dark pools. Clients are offered access to execute large block orders with anonymity.

The prices here aren’t calculated in a general manner. However, there is price discovery. Independent organizations offer electronic market dark pools.

Since the inception of algorithmic trading and modern technology, these programs have allowed traders to execute thousands of trades in seconds, providing an edge over others. When dark pools are combined with HFT, the trades executed with huge volumes of millions of shares are also completed in seconds, giving the traders a huge advantage. And dark pools offer the liquidity required for large institutions and funds.

HFT combined with dark pools allows the big players to execute their large block orders of millions of shares within a few seconds, thus optimizing their execution prices and increasing profits.

Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading

Is Dark Pool Trading Legal?

A secondary way for institutions to trade without anyone knowing? Is that even legal? Yes! Dark pool trading is legal. The good news for us retail traders is that dark pools allow the big trades to happen without affecting our trades. Imagine if one of those institutions came in bearish in a stock, we were bullish in. Whew! We’d be up a creek without a paddle. Thankfully, Alternative Trading Systems are in place to keep that from happening. 

1. Advantages

Dark pools offer various advantages to their users. What are those advantages?

  • Complete Privacy While Executing Trades

Dark pools allow the execution of trades with complete privacy from the general public. Generally, markets and their participants tend to overreact to news of big trades. Therefore, dark pools help avoid this problem. The offering of complete privacy avoids unnecessary price reactions.

  • The Benefit to Avoid Price and Market Movements

The price of the traded security remains stable because the trades aren’t known to retail traders. As a result, there’s no price overreaction or underreaction due to the executed order.

  • Availability of Liquidity and Increased Efficiency

Liquidity and volume are major parts of trading any security. Therefore, dark pools give big institutions and funds huge liquidity to trade millions of shares easily. As a result, this increases the overall market efficiency, providing an advantage.

2. Disadvantages

While dark pools offer various advantages, they also have disadvantages and drawbacks. Let’s take a look at some of the disadvantages of dark pool trading.

  • Total Lack of Transparency

As dark pools offer complete secrecy and anonymity, the general public will not know the big institutions’ moves. As a result, it’s an advantage to the big players but unfair to other investors and traders. The special advantage provided puts all other market participants in a vulnerable position. They have no idea what big players are doing in the markets.

  • Wrong and Unfair Practices

There’s always an element of unfair practice by large institutions combining HFT with dark pools. They can offload thousands of shares within seconds. Other market participants cannot match, making it a big disadvantage.

AAPL Dark Pool Block

The shorter time frames can be used to place long or short trades based on what the dark pool indicator and dark block trades are doing. Here we see $AAPL on a 1 min chart.

Final Thoughts: Dark Pool Trading

Now we know about dark pool trading. And you’re aware of some of the secrets and unknown elements of the stock market. These dark pools are a huge part of the financial market.

It’s a playground for large institutions and other big players. General retail participants can only learn and understand how these dark pools function. Access to them isn’t possible. 

So, with this knowledge, you have now enhanced and improved your stock market awareness. It’s always a benefit to be aware of all the components of our financial world. If you want to feed your brain daily and learn stock trading, join us today.

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