Dark Pool Trading

The majority of retail traders have heard the term ‘Dark Pool Trading’, or ‘Dark Pool Prints’, but don’t fully grasp the significance of dark pool trading and how it can assist them in making informed trading decisions. Whether you’re a day trader or swing trader, or even a long term investor, integrating dark pool trading into your trading plan is sure to be both informative and beneficial to your portfolio.

What is Dark Pool Trading?

Dark pools are private exchanges that are only accessible to institutional traders. Dark pool exchanges were created specifically for institutions and hedge funds to execute large share transactions without affecting the broader market. For example, if retail investors knew that an institution was selling one million shares of TSLA, that may cause panic, enticing retail to sell their positions and potentially creating a dramatic drop in price.  Legally, dark pools are to be reported the same day the transaction took place, however, there is a loophole. Institutions place their orders from different time zones (for example, somewhere in Europe) so that their position isn’t reported until hours later. Sometimes, the transaction isn’t reported until the next trading day.

Why is it Important to Monitor Dark Pool Orders?

Even though dark pool exchanges were invented for institutions to hide their positions, by using options order flow programs, we are able to monitor dark pool transactions. However, we cannot see if these transactions were executed at the bid and ask, which is what stock traders rely on when reading the tape. Despite the lack of visibility, we can see the spot price, share quantity, the ticker, and the total amount spent. This information is important because dark pools tend to be huge transactions, potentially affecting investor sentiment. If we, as retail traders, can learn how to read dark pool orders, then we can ultimately discern which direction that stock is going to move in. Large amounts of buying and selling of the underlying security is what ultimately moves a ticker, and we, therefore, want to make sure we pay special attention to share activity.

Order Flow Programs that Identify Dark Pool Orders

There are three programs I personally know of that identify dark pool orders; Flow Algo, Trade Alert, and Cheddarflow. Cheddarflow and Flow Algo are order flow programs that are geared towards retail and are very user friendly. Trade Alert is a program that is heavily used by institutions and has a much steeper learning curve. However, Trade Alert is also the only program where you can see dark pool orders executed at the bid and ask.


How to Read and Identify Dark Pool Transactions:

Late Signature Orders

Flow Algo and Cheddarflow offer visibility into the spot price, share quantity, ticker, time of the transaction, and amount spent on the transaction. Depending on whether they are late signature orders (as stated above, orders that are executed from Europe and are reported the next day), dark pools, or equity blocks, orders will either show up the next trading day (late signature orders), or approximately 20 minutes later after the transaction (dark pools and equity blocks). Flow Algo, in particular, identifies late signature orders by identifying prints based on the day’s price action (for example, if repeat prints are coming in for a price of $371 on the SPY, but SPY never traded at $371 that day, it implies that the print is a late signature order), the quantity of share size, and symbol (SPY, QQQ, IWM and DIA).

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Screenshot of how to identify late signature orders taken from Flow Algo.

Furthermore, Flow Algo also identifies late signature order prints by color:

Dark pool spy Trading

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Screenshots of how to identify late signature orders taken from Flow Algo.

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Screenshots of how to identify late signature orders taken from Flow Algo.

Dark Pool Prints and Equity Blocks

Dark pools and equity blocks, on the other hand, are identified as buying or selling by identifying the time of the transaction, the bid and ask at the time, relative to spot price, and resistance and support. For example, on January 7th at 10:23 am, a dark pool order came in for BABA when BABA was trading at $222.50 per share:

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A screenshot of dark pool prints of BABA taken from Flow Algo on January 7th, 2021.

Combining Dark Pool Trading with Technical Analysis

This order took below the bid as the bid was $223.57 at this time, and the ask was $223.63. This order took place right above support on the 1-hour chart, before dipping down to support at $221, and then rallying up to a new high of the day of $229.95, slightly above BABA’s opening price, and at resistance on the 1-hour chart. Combining technical analysis when analyzing dark pool orders is key as it will reveal what the institution’s intention is, which assists you in determining if the dark pool was a buy or sell:

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BABA’s chart on the 1 hour time frame. The first black arrow on the left identifies where the dark pool order was executed (support), and the second black arrow identifies BABA’s high of the day; resistance on the 1 hour. It is possible, although not probable as institutions tend to not day trade, that profit could have been realized at this level.

Combining Dark Pool Trading with Order Flow

Shortly after this dark pool order executed, BABA started to reverse above the spot price of the order, and repeat BABA calls start coming through the tape, further confirming our assumption that the BABA dark pool was in fact a buy:

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Screenshot of BABA calls coming through the tape, taken from Flow Algo on January 7th, 2021

How to Integrate Dark Pool Trading into your Trading Plan:

TradePro AcademyTM’s Upcoming Options and Order Flow Courses 

Towards the end of this month, TradePro AcademyTM will officially be launching our options and order flow courses, which in detail teach you the process of using options order flow to follow dark pool prints. Learning how to follow dark pool prints will be a huge difference-maker in your trader’s toolbox, and properly equip you in identifying future rallies and sell-offs in specific tickers and the broader market.

TradePro Flow Twitter

 In November 2020, TradePro AcademyTM launched it’s very own real-time options order flow alerts page on Twitter called TradePro Flow. In addition to tracking options order flow, TradePro Flow also tweets dark pool orders that are significant, accurately predicting rallies and sell-offs to assist you in your day trading strategies and overall portfolio management. Follow us today @tradeproflow and take advantage of this opportunity to incorporate dark pool trading into your trading plan.

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Join us at TRADEPRO AcademyTM to learn how we take advantage of this strategy each morning during the US market open. There has never been a better time to make the investment in yourself!

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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.