Mel Stone joined the BlackBox team to help provide insight into dark pool data. She focuses on following the money trail and finds that researching dark pool activity, options flow, insider buying, and institutional filings provides clues into positions big money players are taking. She prefers swing and position trading. You can find Mel’s research in the dark pool trading room on BlackBox Stocks.
Mel recently hit a winning trade in BA and posted how she did it using flow activity. Mel said, “I saw earlier on the DIA (BA is largest holding) aggressive, short dated, expiration calls that hit the board in BA.
Yes, we did see a dark pool block but when that hit the tape the original assumption was that it was a sell since there was a clear downtrend. Dark pool orders DO NOT provide us with intent of trade (buy or sell), they just make us aware of a large transaction.
Trade was taken based off of all the data I had available from the BlackBox Stocks platform, aggressive flow that provides clear intent of direction.
Below is an image of the flow Mel was watching as well as how the trade worked out.
Dark Pool Data Analysis Tips
Dark pools are an ominous sounding term for private exchanges or markets for securities trading. However, unlike stock exchanges, dark pools are not accessible by the investing public. Dark pools are also sometimes called “dark pools of liquidity”.
Dark pools were invented to facilitate block trading by institutional investors who did not wish to impact the markets with their large orders and obtain adverse prices for their trades.
Dark pool data does NOT provide us with INTENT, we do not know if the large block trade or sweep was a buy or sell. We only know that a large transaction occurred off the normal exchange. Dark pool transactions are done off the exchange and we only get to see the transaction when it hits the tape.
Use options flow analysis to assist with determining intent of dark pool data. Intent should be clear and aggressive for optimal set-ups.
Always make sure that the dark pool print is relative in terms of volume. For example, if Facebook average volume is 17.42 million and we see a 100,000 dark pool print, just ignore it. However, if OLLI has an average volume of 970K and we see a 300,000 share dark print, that’s important because if represents a whopping 1/3 of daily trading volume in just one block.
When looking at dark pool data, look for unusual events. What makes it unusual? A stock repeatedly shows up on the dark pool list. Also, compare dark pool block size to the average daily volume for the stock. If it represents 1/4th the average daily volume or more, it’s an unusual print.
The hardest part about integrating dark pool data into your trading strategy is trying to stay neutral and not create a bias within your mind. Remember, dark pool block orders do NOT give us INTENT. Often times an institutional trader is building a large position for a client and that can take time. We will see repeat orders coming off the dark pool for a single stock but its price doesn’t really seem to do anything and stays somewhat range bound. When you see dark pool prints like this, watch the options order flow. If options sweeps come in that are aggressive and directional, that’s when you make your move to either buy or sell the stock.
Charting Dark Pool Data Levels
You can use Excel or any spreadsheet software to do this. Record the dark pool orders for the ticker you are tracking. In this example, I’m looking at the orders coming off the dark pool for SPY.
Sort the dark pool orders by the block size. In the data above, notice all the activity around the $292.73 level on SPY. At the $292.73 level, heavy dark pool volume occurred, over 6.8 million shares with just the orange highlighted above. We now draw a horizontal line at the $292.73 level.
Now, let’s bring up the options flow data on SPY and look for direction bias around the $292.73 level.
I want to see the options that were equal to or greater than $500,000 in value so that I see what the large players are doing. To do that I’ll set the Options Flow Filter:
Here are the results.
Not a single SPY CALL contract valued at over $500,000 traded above $292.73 the entire day. However, we had a few PUT contracts trade above the $292.73 level. Also, the entire day was dominated by PUT contracts.
Finally, we pull up a 1 minute chart for the day and plot a horizontal line at $292.73 and see if we can visually see a pattern at that level.
Notice that each time SPY got up to the $292.73 level (white line), it pulled back from that level. At the end of the day, we got a break above that level but in the last 30 minutes of trading, the market sold off and ended up closing below $292.73.
Combining both options flow data and visual chart data in the 1 minute time frame, we can reason that most of the dark pool orders we saw were likely sell orders.