The name invokes an evil image, like the bubbling cauldron stirred by the witches in Macbeth.
To some extent, the distrust surrounding these ominous pools is deserved. After all, the rumors of defrauded clients and high-frequency front running are all somewhat true.
More worrisome still, your stock orders almost certainly go through a dark pool before they’re completed…
And you owe it to yourself to know what that means.
A Glimpse Below the Surface
At their most basic, “dark pools of liquidity” are invisible markets that facilitate large stock transactions.
The majority of dark pools are owned by broker-dealers such as JPMorgan Chase, Citi, Credit Suisse, and Goldman Sachs. The remaining few are either owned by exchanges, such as NYSE Euronext and BATS Trading, or they’re independently owned.
For institutional investors, the advantage of dark pools is clear.
Within a dark pool, an investor can trade a huge chunk of stock independent of the public market, essentially preserving the price he or she wishes to receive. The transaction will only be released to the public market after a sufficient delay.
Dark pools also provide loads of liquidity, virtually ensuring that sellers will find buyers, and vice versa. Finally, most dark pool trades don’t incur exchange fees, which can save investors a significant amount of money.
On the other hand, the benefit to retail investors is slightly less obvious – though, in theory, the benefits enjoyed by institutional traders should trickle down to retail investors, as well.
Consider a small-time investor who owns a few mutual funds through, say, Morgan Stanley. Morgan Stanley is constantly buying and selling shares, often in bulk, and any price benefits that the institution receives should theoretically transfer to anyone invested in its mutual funds.
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However, dark pools also create pitfalls for retail investors. For instance, if someone buys shares of Apple on the public market just as a huge sell order is being completed in a dark pool, Apple’s stock price may collapse once the large transaction hits the ticker.
Furthermore, dark pools are sometimes vulnerable to high-frequency traders who attempt to front run large orders, ultimately costing firms – and their clients – a lot of money.
Illuminating the Dark Pools
Whether dark pools deserve their wicked reputation or not, they’re an integral part of today’s market – and we need to know how that affects us.
Yesterday, I told you that Wall Street Daily’s Senior Analyst, Jonathan Rodriguez, was ready to illuminate Wall Street’s infamous “dark pools.”
If you’re skeptical, I get it.
By nature, dark pools are invisible. They’re predicated on the idea that institutions can trade without the rest of the market knowing.
But here’s the thing…
Dark pools leave “footprints” – subtle but telling clues to the trades taking place within them.
Indeed, more and more trades are being executed at certain “trigger points,” and Jonathan has identified a pattern that predicts when they’ll hit.
Even the largest financial institutions in the world, trading in invisible pools of liquidity, are inevitably trading along this pattern.
That’s all I can say for now… but tomorrow, I’ll explain just how staggering the implications of this discovery will be.
Until then, good investing.