Institutional Trading, Dark Pools, and How To Profit

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.
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Rise of Dark Pools To Combat HFT Desks

Goldman Sachs just hired exchange owner Nasdaq Inc. to run its dark pool Sigma X stock-trading system. The Nasdaq has spent years working on “Ocean,” its dark pool hosting service.

Dark pools are similar to standard markets with one big exception; they can hide their activity by not printing the trades to any public data feed. If a regulatory agency requires dark pool trades to be printed to a public exchange, they will do so but with as large a delay as legally possible. In a dark liquidity pool, neither the price nor the identity of the trading company is displayed.

Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on public exchanges but without showing their actions to others.

High-frequency trading (HFT) has long benefited from large blocks of equities moving. With a dark pool, institutional traders can move large block orders without showing the HFT community what they are doing.

Dark pools are run by private brokerages which operate under fewer regulatory and public disclosure requirements than public exchanges. Reuters writes

Around 40 percent of all U.S. stock trades, including almost all orders from “mom and pop” investors, now happen “off exchange,” up from around 16 percent six years ago.

Nearly half of all U.S. stock trades, we are not even seeing! So much for paying extra for Level II access, you’re still as blind as a bat!