Shadowtraders

Trading Futures? Better than Falling into NYSE's Dark Pools

What exactly is a "Dark Pool"? How does one stop from falling into this it when buying and selling New York Stock Exchange (NYSE) stocks? Should I be afraid of Dark Pool liquidity when I am trading? Will "Dark Pools" end up hurting small retail investors? Are "Dark Pools" just something else to add to the unfair playing field known as "Stock Trading?" Better read on if you are not familiar with being in the Dark....

First, what is a dark pool? Wikipedia defines a "Dark Pool or "Dark Pools of Liquidity" as "trading volume or liquidity that is not openly available to the public. The bulk of these represent large trades by financial institutions that are offered away from public exchanges so that trades are anonymous." And all this time you thought that trading was transparent, that you could see the actual number of trades made by institutions to know if the "insiders" were buying or selling their own stocks.

Ok, but just how much trade volume do Dark Pools represent, surely that is a small fraction of the overall. Rosenblatt Securities, an institutional stock trading firm, tracks Dark Pool investments. They reported that "Dark Pool" investments executed nearly 13% of all trading in January 2011, up from 10% in January 2010. "Dark Pool" executions are going up steadily. If you combine Dark Pool trading with High Frequency Trading Robots, they now account for over 80% of all trades done with NYSE stocks.

What exactly is a "Dark Pool?" "Dark Pools" do not have visible bid/ask spreads as normal stock trading does. Smallers investors cannot see orders ready to trade, unlike a public exchange such as NYSE or Nasdaq. For institutional traders, the advantages of "Dark Pool" executions is flexibility. Chances are the prices will be better for them as they are trading institution to institution. For smaller investors, however, this means the published price and volume may not be the real price and volume.

How does this work for institutions? Say a mutual fund wants to sell 100,000 shares that it owns of XYZ company, but only wants to sell in case there is a major catastrophe. It places a stop limit order in the "Dark Pool" area that goes off only in case the market drops. Smaller investors are not aware of these pending stop limit orders. Now there is a problem with the economy and the Market drops. The "Dark Pool" trades get executed, driving the prices even lower. Smaller investors could not see this coming.

Once again, the smaller investor is at a disadvantage. They work hard, doing research, determining the sector to invest in, they look at the CEO, management, products, etc. Then they are blind sided by "Dark Pook" trades they never saw coming and had no visibility to.

There are actually 3 types of "Dark Pools" now, which is why it is growing in leaps and bounds. There are independent companies that offer private trading networks for executing large trades for their own customers. There are broker-owned "Dark Pools" where the brokers clients buy and sell -- very often with other clients of that same broker anonymously. Lastly, there are public exchanges that have created "Dark Pools", allowing their customers to trade anonymously (without visibility to their orders) while still providing an exchange ‘infrastructure’. With so many variations, "Dark "Pool" trading is on the rise.

For smaller investors, it is becoming increasingly more difficult to get a fair shake trading stocks. For this reason, smaller investors should look to trading futures. There contracts all trade on the same exchange, with visibility. With emini futures trading, it is as if you are trading stocks, but all the top 500 at once. The payout for winning is better, the leverage is better, and the transparency is better. Overall, it is a level playing field. Active traders beware! Lest you fall into the deep dark pool of the NYSE.

Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to shadowsupport@shadowtraders.com or call 866-617-2037 today.

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Testimonials disclosure. Unique experiences and past performances do not guarantee future results! Testimonials herein are unsolicited and are non-representative of all clients; certain accounts may have worse performance than that indicated. Trading Futures involves substantial risk and there is always the potential for loss. Your trading results may vary. Because the risk factor is high in Futures trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade Futures. No "safe" trading system has ever been devised, and no one can guarantee profits or freedom from loss.

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