Question:
Do you see “Dark Pool Liquidity” making Volume indicators currently or at some future point ineffective? Mutual Funds are using it now and maybe increasingly in the future.
MasterG from Threatville
Answer:
MasterG, this murky, muddy, and otherwise shady practice is, in my mind, a threat of unknown proportions. The stated purpose of these “dark pools” is to allow large institutions to trade large blocks of stock “off the radar” so as to minimize the impact on the market.
Dark pools are similar to standard markets with similar order types, pricing rules, and prioritization rules. However the liquidity is deliberately not advertised – there is no market depth feed … In addition [brokers] prefer not to print the trades to any public data feed, or if legally required to do so, will do so with as large a delay as legally possible – all to reduce the market impact of any trade.
Your question about how this affects volume indicators is interesting, thoughtful, and motivational. I am now motivated to learn as much as I can about the impact this practice might have not just on volume, but on the overall market as well. I am not alone. Congress is now investigating dark pool liquidity in its effort to re-regulate the financial industry. In fact, legislation to shed light and regulate this practice is openly discussed in both houses of Congress.
The flip side of this is that keeping these behemoth trades “secret” does reduce the dramatic impact these trades would have on individual markets, which allows for a somewhat more “level” trading environment. Legally, though, these dark pool trades are required to be “on the books” of the brokers who make them. But with all things done in deep shade, shenanigans can and do occur.
Dark pools are often formed from brokers’ order books and other off-market liquidity. When comparing pools, careful checks should be made as to how liquidity numbers were calculated – some venues count both sides of the trade, or even count liquidity that was posted but not filled.
Even though dark pools exist, the markets do go on, traders and investors are still trading, investing, and making money. Although this practice is not secret, it is secretive, and that, in the already manipulative financial world, makes the actual practice of dark pool liquidity something we should all want to know more about.
Trade in the day; invest in your life …
