Dark pools are private exchanges, referred to as Alternate Trading Systems (ATS), that allow institutional traders to execute large block trades of shares.
In order to not alert the market and disrupt the price of an asset before getting filled, Institutions use these private exchanges to hide under the radar of the open market while looking for buyers or sellers to match with.
Unlike Options Flow Data, Darkpool data does not become available to the public until after the trade has been executed, and even then there is a lack of detail to the intention behind the trade. Because of these limitations, it’s best to use darkpool data along with options flow and technical analysis to formulate your trade decisions.
Let’s dive into how traders can effectively utilize darkpool by looking at QQQ’s accelerated selloff on February 17th.
As I said before, darkpool alone is not an indicator, but rather a tool that works with an effective charting strategy and options flow. Above we see QQQ trading within a tight channel between the 20 day SMA (green) & 100 day SMA (red). On Feb. 16th QQQ fails to break above its 100 day simple moving average for the 2nd time in 2 weeks. This indicates buyers view the 100 day SMA as an area of little value to purchase QQQ. The next trading day we gap below the 20 day SMA, an area that was defended 5 times in the past 3 weeks.
At this point there is clear opportunity to the downside from a technical perspective. Now let’s look to the darkpool market for institutional insight.
A BIG player stepped in, selling 1.43M shares on QQQ, for a total of $512M. The darkpool data here perfectly confirms our belief that there is a downside opportunity in QQQ. We also get the sense a selloff in QQQ will be a multi-day trend. Institutions tend to use the darkpool exchange to build swing positions since they don’t have to worry about theta.
Our last indicator is the put/call ratio in QQQ options flow on Feb. 16th, the trading session before we get the gap down in QQQ that starts a downtrend. Put volume exceeds call volume by 77%.
Let’s take another look of how to utilize darkpool data with a recent sell-off in NVDA.
NVDA came down to test the critical 200 day SMA on April 6th. Once again we looked to the darkpool market to see if any institutions were building positions that confirmed or denied our technical analysis.
Once again we see an institution building a sizable short position on the day our support level is tested on the chart. This is critical in determining if your trade idea is valid since big money moves the market.
Darkpool isn’t just used as a confirmation tool. Often, signature darkpool levels act as future levels of support and resistance.
On January 18th we detected massive sellers in SPY, selling a total of 5,548 shares for a whopping $2.579B.
Looking to the chart we see this massive selloff in SPY shares at $464.72 has since acted as a critical level of resistance. SPY has failed to advance above the signature darkpool price level since January 18th, rejecting on every attempt.
Just remember, darkpool alone is not a guaranteed indicator, but rather an important tool in our trading tool belt to factor into our decision making.
Discover an opportunity in the darkpool market via TitanFlow