Background On The Dark Pools


Whales, Sharks, and Tuna


The stock market is much like the ocean.  Traders fall into 3 categories: whales, sharks, and tuna.  The whales are the big funds.  They trade in the millions or billions of dollars.  They buy the lows and sell the highs.  Their big trades move markets.  The sharks are the high frequency trading machines (HFT's).  The HFT's buy and sell quickly.  They like to drop price to force you out of a position and then buy those lows, only to drive price up again.  Then they sell you the highs and and drop it again.  If you are reading this post, most likely you are a tuna.  The bad news is that most tuna get eaten.  Some tuna get away.  The best strategy for a tuna to live is to follow the whales and avoid the sharks.  Read on to find out how.

The Boys at Mission Control

Most people think that news drives the stock market.  One would think that the stock trading masses see news and then the market reacts.  You might be surprised, but that's not really what happens at the core.  The market is really controlled by the big players.  I call these people by several different names:
  • The boys at mission control (or the boys)
  • Big money
  • The banks
  • or most simply "They"
"The boys at mission control" like to buy low and sell high.  They follow Warren Buffett's strategy:

“Be fearful when others are greedy and greedy when others are fearful.”

Dark Pools

The big investment houses follow different rules.  Their trades are normally called "Dark Pools", "Block Trades", "Dark Pool Prints", or sometimes just "Prints".  Many times, Dark Pool trades show up late.  The trades during regular trading hours (RTH) often appear in after hours trading (AH) with no price information.  Those RTH trades may not show up in the daily volume for a particular stock or ETF either.  They do leave footprints if you know how to look for them.

Dark Pool Prints can be found in "tick" data.  One tick = one trade.  Stocks can have millions of trades, so finding them is best left to a computer.  My preferred search is looking for trades that are more than 50,000 shares.  

One share of SPY is $374.52.  50,000 shares = $18.7 million.  Here are some prints from last Friday (1/15/2021).  The price and volume are easy to see on these particular prints.  The direction of the trade (buy or sell) is a little harder to glean.  The only way to determine the direction of the trade is to look at current price in relation to the price of the trade.  SPY sits underneath trade price by a little more than $1.  What if you also knew that another $6 billion of block trades printed at $377 on Friday?  Price is almost $3 under those trades.  That smells a little fishy.


What if you also knew that they traded TLT last week in massive amounts (at the lows in fact)?  Some of you may know that TLT (US Government 20 Year Treasuries) often goes up when the market goes down.  TLT doesn't always do that, but often it does.


So SPY price is under several billion dollars in prints.  TLT price is over prints.  Those are our clues.  That looks like the boys at mission control are selling SPY and buying TLT.  That assumption is dead wrong if price jumps over those prints.  I like to call these inflection points "pivots".  SPY is bullish if it goes over the $375.62 print and more bullish if it goes over the $377 print.  

One last thing to note is that the stock market does not typically go straight up or down.  The boys like to take price down a little at a time, so you don't notice.  They will take the market down $3, then up $2, then down $4 or something similar to that.  Then they may take it back up $4, down $3, and up $2 more.

News this week

Looking at the news cycle, Biden proposed a $1.9 trillion stimulus package.  That should have driven the market up, right?  Hmmmm.  Maybe he should have proposed $2 trillion.

Footnotes

  1. Bill Albert coined the term "The Boys at Mission Control".  He is an excellent and entertaining trader, but he doesn't post anymore.
  2. Stefanie Kammerman (@VolumePrintcess on Twitter) is one of the leading authorities on Dark Pool trading.  She has a book on her web site that explains Dark Pools much better than I have in this short article.  Her web site is https://www.thedarkpools.com. 
  3. Another trader who is quite knowledgeable about the financial news cycle is Jesse Stine (@InsiderBuySS on Twitter).  You can sign up for his "friends and family" email at http://jessestine.com.
  4. Chuppy does a weekly dark pool analysis at this site https://insidetradebook.com/shop-page/
  5. None of the data posted here is from another site.  All data comes from my own proprietary tool.

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