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Dark Pool Trades Explained 

What are Dark Pools?

What are Dark Pool Trades

Dark pool trades, also called “prints,” are block trades of stocks that are done over-the-counter (OTC) through a private exchange that only institutional investors can use.

“Dark pools” is the name for these private exchanges, which are also called “Alternative Trading Systems” because they are not open to the public.

According to the CFA Institute, dark pools are becoming more and more popular. In 2017, about 40 percent of all stock trades were made in dark pools, up from about 16 percent in 2010.

Why Do Institutional Investors Use Dark Pools?

There are two main reasons why institutional investors trade in dark pools:

  • Find buyers and sellers for big orders without letting the public know what you’re up to.
  • Get better prices for trades that are already done.

Institutional investors can use dark pools to find buyers and sellers for large orders without making the move a lot (typically against them).

How could this be? Dark pools are not required to let the public see the order book.

Instead, transactions done through dark pools are added to the consolidated tape after a delay.

For example, let’s say an investment bank wants to sell 400,000 shares on a public exchange like the New York Stock Exchange.

As soon as institutional investors or high-frequency traders see a large sell block hit the order book, the markets react, and the value of the security would probably go down before the investment bank could find enough buyers to fill the entire order.

But if the trade isn’t made public until after it’s been done, the news has much less of an effect on the market.

Large stock orders can also be filled in dark pools to get better prices.

There are two ways that trades made on dark pools can have lower transaction costs:

  • Most dark pools have lower exchange fees.
  • Because prices aren’t clear, trades may be made closer to the middle of the quoted bid-ask spread.

One common complaint about dark pools is that if enough shares are traded through them, the prices of stocks on public exchanges might not match the real market value.

Even though the above scenario might work out well for the investment bank selling the shares, think about a small investor who just bought shares of the company that the investment bank just sold 400,000 shares of on a dark pool.

Once word gets out that those 400,000 shares were sold, the price of the stock could drop, and the person who just bought shares may have paid too much.

How Long Are Dark Pool Trades Delayed?

According to FINRA’s reporting rules for dark pools, trades made between 8:00 am and 8:00 pm EST must be reported within 10 seconds of being made.

Trades made between 8:00 p.m. and 8:00 a.m. EST must be reported by 8:15 a.m. the next day.

A very important note is that a trade is not “executed” until the entire order is filled.

Because trades on dark pools tend to be big, it could take several hours before the trade is fully filled and reported to FINRA.

If the trade happens outside of normal market hours, the reporting could be even later. In some cases, a trade might not be made public for up to 24 hours.

Institutional investors found a way to add to the delay by not having to report trades right away. They did this by making trades on European “dark pools.”

Trades made on European dark pools might not be reported until hours later or the next trading day.

Why Are Dark Pool Prints Important for Traders?

Understanding dark pool prints is important for figuring out how the market will move in the future, how trends will change, and where support and resistance levels will be.

Dark pool prints are an early sign of how the market will move in the near future.

This is especially true for big indexes like SPY.

In the past, SPY dark pool prints have been a strong indicator of big market moves that are about to happen.

A pattern of multiple large trades with bullish traits has predicted very large bullish swings in the market as a whole, and the opposite pattern has predicted major downturns.

Dark pool prints can show when a trend is starting or changing.

Any ticker’s dark pool prints have been just as good at showing the start of a trend or a reversal.

A change in trend can be shown by a pattern of several large trades with bullish characteristics on a ticker that has been going down, or the same pattern can show the start of a trend on a ticker that has been going sideways.

Support and resistance levels can be found by adding up the dark pool prints.

Keeping an eye on the prices at which dark pool prints are traded over time can help you find levels of support and resistance.

If a ticker is trading down, finding large dark pool print accumulations below the current price will show support levels where a reversal may happen.

The support level is likely to be stronger the more trades there were at that price.

The same is true for large amounts that are worth more than the price at the moment.

The price with the most volume can show the level of resistance where the ticker may stop moving up and start going down again.

The full picture of market value can be seen in dark pool prints.

If traders don’t know everything about dark pool prints, they might pay too much for equity security.

Consider the retail trader in the above example who didn’t know about a large dark pool trade that would have changed the price of the stock if it had been traded on a public exchange.

How Do You Find Dark Pool and Lit Pool Prints?

Credit Cadabra makes it easy to figure out what dark pool prints mean.

Credit Cadabra goes beyond dark pool prints to give a full picture of what institutional investors are trading. It does this by showing real-time options flow, analyzing news for sentiment, and analyzing trends.

Together, these features close the information gap between retail traders and institutional investors. They help traders predict how the market will move and find patterns that can help them make money.

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Francesca Castillo

Francesca Castillo