Well, we sort of covered the idea of what ‘dark’ and ‘light’ are in the primer prequel to this;
When it comes to the Stock market and Dark Pools, people (generally the public) beg the question:
Do they exist?
Well, for the purposes of trading and money within this simulation we commonly agree to as ‘life’.
Yes they do exist,
Generally Speaking, when people say ‘Dark Pools’ they refer to ATS or Alternative Trading Systems that are like mini-exchange platforms or venues (kind of) outside of the traditional larger markets of NASDAQ or NYSE or AMEX or insert-exchange-name. Just know that there are a lot of fucking exchanges, and I’ll remind you later that there are. A. Lot.
In simple words by Industry standards, a Dark Pool is simply ‘a market that does not offer information about its quotes.’ Said by many Industry professionals.
What is the TLDR on Dark Pools?
This is a simple rundown of Dark Pools, a lot of it is simplified, but the Map can’t logically be the same size as the Territory. Or else that would be retarded and something-something Bonnini’s Paradox.
- There’s a lot of fucking exchanges. (NASDAQ, AMEX, NYSE, NYSE Arca, the Unsophisticated CHX and CBOE, IEX, BATS, ABCDEFG, IDGAF any more, etc.) And trades are either On Exchanges or Off exchanges.
- Almost everyone has a Dark Pool. (Prime Brokers, Banks, Hedge Funds, Market Makers, Brokerages, etc.) They have their own inventory of shares and stuff they can trade between themselves or their customers through their trade desks. Imagine a Bank clerk, but handles trades.
- A Dark Pool is a regular exchange (or Venue if you’re European) but not visible for others/openly. Dark Pools could broadly be described as ‘off exchange’ trading or ‘alternative trading’.
- The purpose of Dark Pools are to staunch the volume trade in price volatility and fluctuations due to large buy and sell orders.
That’s the Quick ELI5 TLDR, but there’s more for a deeper ELI6 TLDR;
- Dark Pools were Initially created to not manipulate the market, to not cause large block trades, and to not signal or telegraph the moves of Large Financial institutions to other competitors. Thereby protecting large block trades from getting poached and sliced up by HFT algorithms and other Mushroom-Quant products or ‘Solutions’ as they say.
- However, after a while HFT’s were allowed on Dark Pools to take Large orders. This big ones get diced up in HFTs. (If we’re nice, in ’round lots’ of 100, or if the Broker/Dealer is playing a price game, in odd lots). Depending how it’s done, it can affect price, or not affect price.
- Dark Pools circle jerk other Dark Pools. Essentially trade can occur between Dark Pools. Never having reach the market. Which is fine in most cases, and sometimes not fine, depending on how it’s used. (whether you want to affect the price, or not)
- If Dark Pools don’t get trades filled, the trades may go to the public exchange and use algos to limit price shifts. Which is unpreferable, but an execution is generally better than no fulfillment and no execution.
Note how points 6. and 7. gives the ability to affect or not affect price. Essentially the option to manipulate price. Move it up or move it down. That’s going to be important in later articles.
- In theory, you could front run and manipulate Order flow using Dark pools, in theory. *ahem*
- Dark Pools are supposed to offer/guarantee best price. . . But due to the opaque nature, that’s not always the case.
- Brokers don’t always offer best price, because there is proof that they got fined for that shit. . . Which will be covered in later articles, or if you want to do a quick search you can find out yourself.
That’s it for Dark Pools, here’s me talking shit for no reason. A supplementary read;
- Some banks/brokers were/are assholes. Most just make honest mistakes. . . Plenty of times. . .
- Order execution makes money for Market Makers, aside from PFOF. (But also PFOF for Broker-dealers something to do with a ‘rebate’). ((Huh, PFOF is just a master-re-bater, lmao)).
Here’s another take on Dark Pools from a 2009 post by a Wall Street ‘Veteran’;
A sort of where did they come from and what do they do?
Kind of begs the question, “How much did the game change from 2009 to now?”
There’s even research Papers and Senate Hearings on Dark Pools
I’m just trying to make extra sure that you understand that Dark Pools Exist;
In fact, the ‘dummies’ guide books has a section saying that Dark Pools comprise of 40% of the entire US Stock markets;
But don’t worry, we’ll learn in the future that estimates for how much trades are happening in Dark Pools are between 53% and 70%. Heck, in theory, it can be even more than that. But we’d have to do some napkin math to help prove it.
Yea, so Dark Pools exist. Large Dark Pools can be analogous to oceans, the water is undoubtedly money or paper-backed contracts. There are whales with big AUM money as well as sharks that hunt the blood trail.
Guess what you are if you’re trading in these markets?
Oh yea, what do whales eat? Plankton.
Well, we described that Dark Pools exist. That’s the real take away. I have to specifically spell it out, because you’ll soon learn that people think Dark Pools are a ‘boogey man’ that don’t exist. If you go ahead and re-read the previous sentence, you’ll learn that people think Dark Pools are a ‘boogey man’ that don’t exist.
That’s recursive education for you, using implied information and planting assumptions to get you to learn that people are misinformed and that’s great.
It’s a lot to take in, but the scam is worth it. I think. . . maybe. . .
Especially since you get to be informed at how misinformed others are.
And of course, this is coming from a market outsider like me, so as always;
*Not Valid Financial, Legal, Life, or Any Advice
There’s a lot more spry examples, that I’ll probably cover in supplemental additions and sparknotes after the end of this series. So, it’ll be worth a read by no-one ever.
I’ll add any updates at the very end of articles as I usually do. If I decide to back track for whatever reason.
I also apologize for the lack of Memes. It’s been a ‘meh’ year.
These half-assed articles are bottom Shelf, I tell ya.