Tuesday, May 3, 2011

Traders Can Watch Large Block Trades Purchased in the Dark

Dark pools are separate markets from the larger exchanges with all the same rules, except the volume is deliberately hidden or posted with as much a delay as possible from the public. This is done to limit the affect or impact of the market trade. Anybody wishing to dispose/purchase a large block of equity will want to do this quickly and anonymously to get the best deal.

Fair Price discovery and the removal of liquidity are two criticisms of these markets. Are any price improvements given by the system taken away from the rest of us because of the removal of liquidity? Favorable rebates are given to promote liquidity and usage. The "gaming of the system", which happens to some extent on the major exchanges, is also mentioned because of the deliberate concealed actions taken by the participants.

The Myth of Large Trading Blocks
"The average size of an order executed on the New York Stock Exchange (NYSE) and NASDAQ continues to decline, from 1,400 shares per trade in 1998 to 600 shares in 2003. By 2009, the average order size executed on the NYSE declined to 275 shares, and over 99% of orders executed are less than 2,000 shares. The average order size executed on the NASDAQ in 2009 was 270 shares. Meanwhile, some media outlets report industry average trade sizes of less than 200 shares." according to the UAT thought document

Using sell-side/buy-side algorithms the larger trading blocks are broken down into smaller transaction shares and sold throughout the day on large board markets without the public knowledge.

The ubiquity of free [or almost free]   level 2 websites  and brokers-dealers has caused the disappearance of large block market trades. Retail investors only see the smaller blocks listed on their computers. 

Even Professional Investors Want to Know What & How Much Was Traded
As a retail investor, I don't have access to group deals, dark pools or great commission prices. In the news yesterday there was a press release about a new dark pool aggregator. Direct Edge has added access to 7 dark pools by using Connect EdgeOn their website homepage they have a combined total of shares traded for their most active stocks. You could probably do this on any platform. I like anything that's free, so I began my snooping around.....

Since SLV is on the most active list, the combined total shares exchanged in this dark pool on May 2 were $15.5M. The total volume listed on Yahoo for SLV was $184M. That's approximately ~10% total SLV volume on this site, alone. Yahoo has listed SLV's 3 month average volume as 47M.  $15.5M over $47M is ~32%.

Nasdaq's After Hours volume on SLV WAS $2M shares UP
What about Nasdaq's unusual volume list? SSRI, a mining stock, was DOWN ~10% and had a change in volume of 89%.

In conclusion, these pools don't affect the day-traders or scalpers much; Neither does it harm the long term investors with a long time-frame horizon. But momentum traders, trend followers and shorts are affected. Finding alternative websites with lists of shares traded off the public exchanges would be a way to uncover hidden advantages. Do you know of any sites that have dark pool equities listed?

Dark Pool directory:
Dark Pool PDF by Advanced Trading Reports
Dark Pool Wiki List

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