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What a crazy market it has been…

With so much price action in stocks, I believe the financial institutions are turning to one area…

To execute their trades.

You see, the dark pools actually allow these large players to be “discreet” with their orders…

So they won’t impact the market.

Not only that, but it allows for them to place trades under the noses of those who don’t have access to the dark pools.

So why do the financial institutions love the dark pools, especially in these times?

 

[Revealed] Why Wall Street Loves Dark Pools

 

Now if you don’t already know…

Dark pools are alternative trading systems that allow traders to operate “in the shadows”. A large portion of the volume trade is actually executed in the dark pools…

And according to the SEC, there are more than 40 approved “private” venues.

I know what you’re probably wondering…

Why do financial institutions prefer trading in the dark pools over traditional exchanges?

There are two main reasons that come to mind:

  1. Large institutions don’t have time to dilly dally with orders. One of the major benefits of dark pools is they allow the funds to trade large blocks of volume without disturbing the market.

    On a public exchange, you see quotes displayed with bid/ask prices, but the market makers (mainly algorithms these days) are typically too afraid to display a lot of shares on “the book.” After all, a news story can hit at any second—they don’t want to get caught off-guard.  

  1. Anonymity. Since dark pool trades are off the exchanges, the only way you’ll know about the trades is by subscribing to a service that flags down block trades… or developing a proprietary dark pool scanner.

On the other hand, if the financial institutions were to place trades on a lit exchange… such as NYSE or Nasdaq…

They actually run the risk of impacting the prices.

You see, if someone knows there’s a large order on the buy side for a stock…

They can look to buy shares of that stock or even calls.

Consequently, that can cause shares to pop.

For the financial institutions and hedge fund traders… that can hurt their position.

On the other hand, if those trades were placed in the dark pools, it gets harder to figure out which stocks the “big money” is piling into.

While the dark pools can help with anonymity…

It’s not completely anonymous… and there are ways to detect their moves.

For me, I use a dark pool scanner to uncover these trades.

To have a better understanding of how the dark pools work, I think it’s helpful to see which stocks went off in the dark pools and to keep an eye on them.

You can find out which stocks I detected that went off in the dark pools last week here.

Author:
Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

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