Institutional Trading, Dark Pools, and How To Profit

Posted by on February 20, 2017 11:29 AM
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Categories: Lessons

In this lesson you will learn who the “smart money” is, their trading habits, and how they move millions of shares without anyone noticing. These institutional trades are hidden inside of secret dark pools. You will also learn how amateur traders can profit from dark pool trading.

First, let’s start off with a good description of who the “smart money” is and why they use dark pools to trade.

How To Profit From Dark Pools

Traders pick up orders from the dark pool and execute them in the open market. Even though we can’t see the trades inside the dark pool, we can see the trades as they come off the dark pools to be executed in smaller blocks in the open market.

For example, on September 6, 2016, a huge 2.6 million shares trade was detected in Wells Fargo. It was “smart money” dumping massive long positions over dark pools. The actual trade was probably for 15 million shares or more, but the smaller block orders of 2 million and 2.6 million shares coming off the dark pool and into the public market was detected by the block trades screener in Etrade Pro.

On September 8, 2016, two days after large block orders were detected in Wells Fargo, the news broke that 5,300 bank employees had opened 2 million bank accounts, and charged fees on those accounts, without customers authorization. The “smart money” knew about the coming scandal and was quickly unloading Wells Fargo stock before the story was released to the public.

The way to profit from large block orders is to use the price level at which large block orders were detected as a pivot level. If the stock begins falling below that pivot level, the “smart money” is selling. If the stock rises above that pivot level, the “smart money” is buying. I like to look for patterns of several large block orders to confirm the buying or selling. This is why we also use a Level II quotes tool to look for a pattern of large block orders in a given security. Think of it as the block trades screener finds the large block orders in a given security, while the level II quotes lets you zoom in and focus your attention on that security as you look for more unusual block orders.

Setting Up Your Dark Pools Screener In Etrade Pro

In Etrade Pro, you can monitor level II and large block trades by setting up the block trades screener, level II quotes, and finally a chart tool.

Click on Tools, select Strategy Screener:

Select Block Trades from the Predefined Strategies list:

The screener captures orders of more than 20,000 shares, then filters the results based on the average daily volume and the relative volume. Click the Go button.

The block trades screener in Etrade Pro tracks the largest dark pool providers Liquidnet and POSIT among other undisclosed markets.

Now set up the level II quotes tool by clicking on Tools, select Market Depth:

Finally, to add a chart tool, select Tools and Chart.

You want to link the level II quotes tool and the chart tool to the block trades screener so that when you click on an alert in the block trades screener, it pulls the level II quotes and the chart for that security.

Left click Links in the top right corner of each of the three tools we added above and set them all to the same link:

Under link setup, the link you assigned to the three tools we added above should look like this:

Your final layout screen should look like this: