Dark Pools Explained - How Institutional Investors Utilize Off-Exchange Trading
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- เผยแพร่เมื่อ 23 พ.ค. 2024
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With GameStop back in the news, I wanted to take some time to touch on a topic that often comes up with stories of market manipulation and the like: dark pools.
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DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution, although Richard does work as an employee for an investment manager. Richard Coffin does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers
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let's say you do a dark pool transactions are plain market manipulation
btw for cryptobro's
off chain transaction = dark pool actions
(kinda)
Oops someone pooped in the dark pool
_"Dukeeeeeee ... !"_
LMAO!
While I would agree there are legitimate benefits to dark pools for certain traders or types of trades, I'd argue those benefits are only specifically for them, and are at the expense of everyone else. Dark Pools go against the fundamentals of what a public market is meant to be. For example, yes a dark pool would prevent a large pending trade from affecting the market, but I'd argue that it's suppose to affect the market. Any action on the market will affect the market, and that's how it's meant to work. Adjusting to and accounting for market shifts due to things done on the market is itself part of what defines it as being open and public...
If we want to allow trades to be private until filled, then they should all be private until filled by default without the need for dark pools. Letting only some people do that undermines the entire system so much that we might as well not even have a public exchange to begin with.
Agreed. The workaround to that is to limit how the order is posted or how the trade is worked. A broker is free to post a trade in as many blocks as they would like, creating the illusion that an order is smaller (or potentially bigger) than it really is. Smear those trades across time and you can accomplish the same thing dark liquidity does, arguably faster. I’ve used both trade working algorithms and dark markets and I would prefer to use a lit market algo to get an order filled quickly and with a high degree of pride efficiency. And yes, you could theoretically ban algo trading (lol, try) but then the trader just works the trade manually, accomplishing the same thing at a higher cost.
Retails investors can do all of this too, except that it quickly becomes prohibitively expensive.
I would argue that a lot of dark market trading is just mental stroking on the part of the trader. Issuers of sufficient market cap to ever fill a large order dark are so liquid an algo would’ve filled it faster and cheaper anyway. Smaller issuers where a big order might be disruptive are going to get filled through a cross.
Dude, if you're going to outlaw dark pools, Robinhood will just charge a transparent commission.
Every single market in the world will have exactly the same price. If the price of the security is $100 on the exchange, it will be maybe $100.01 in the dark pool.
This is because of arbitrage. A buyer in the dark pool will not accept a higher price than the exchange. A seller on the dark pool will not accept a lower price than the exchange.
So you end up with almost the same price everywhere minus the volatility
Could not have said it better myself.
completely agreed
Not surprised. You can pretty much do whatever you want with OTC trades.
Edit: I can see a clear advantage in using these pools to avoid those high frequency traders who read or ping the order stack for scalping opportunities.
That's basically how Robinhood makes a living. Scalpers pay them rent to access their dark pool.
@@samsonsoturian6013 They do it on EVERY trade, OTC or not. Same goes for ANY brokerage that offers "commission free trading." That's what makes it commission free, HFT firms buying access to order flow.
But that's HFTs for you. Want to see something depressing? Look at the property prices around the CBOE servers located in Aurora, IL. That's where some of these guys are physically located, trying to squeeze out microseconds being that close with fiber optic lines so they get their edge over the other HFT players.
Next on a menu, "failure to deliver" and practice of share landing by brokerages.
He’s a shill so he’ll probably tell his viewers “It’s a great idea to lend your shares! Be sure to turn it on!” It won’t hurt your investment at all lol. Unless you know what you’re doing, do not knowingly use or support share lending? PFOF, dark pools, etc.
Related reading:
Dark Pools, by Scott Patterson (2013)
Flash Boys, by Michael Lewis (2014)
Ten years ago when Flash boys came out, I had the opportunity to sit in lecture and have lunch with professor who wrote some of the HFT algorithms. His lecture started with this
"Who's read Flash boys?"
*a bunch of Financial Advisors raise hands*
"That guy is an idiot. We've been doing this for years. It's not a secret."
@@TheHunnyRunnerwhat did he say makes him so idiotic?
Flash boys just felt like an AD for that one guy's service.
Can't get enough of the flashes of ominous music in these conspiracy explanation videos lol
It's not a conspiracy.
The biggest advantage seems to be to the dark pool operators. If Morgan Stanley sees big trades coming on their dark pools and trade on the regular market based on that info before it becomes public knowledge. I assume that’s illegal and they need some kind of firewall between dark pool operations and other systems.
That's called frontrunning and is illegal
@@samsonsoturian6013And yet, it’s still happening.
poking the ape nest with this one lmao
🐵🐵🐵🐵🐵
You're not on their radar except if you' happen to be a beneficiary of one of their pension plans. Pension plan beneficiaries could be anyone so, fortunately, managers agree to act in the best interest and take a fiduciary standard of care for those beneficiaries. I would know. I've met them. But they still think most of those beneficiaries are dumb.
That’s probably a part why this video was made. Giving out level headed information on a topic with a lot of bad actors
@@placeholderdoe Bad actors are on the side of the "apes" too. Lots of benefit to front run retail in both Long and Short, spike the price to drive engagement, sell off on a pump. Easier said than done of course.
@@TheLargestBlock My apologies if I worded in a way that made it seem like I was on the side of the “apes” the bad actors I was referring to were actually the “memestock apes”. Please don’t worry about me, I know that they are a group to stay away from. Have an amazing day!
Retail traders at IBKR trade trough darkpools
I believe it's just IBKR Pro clients no? I was very close to mentioning this in the video but couldn't confirm their platform actively allowed small retail trades to opt for dark pool fills, and I don't use them myself, so I left it out.
@@ThePlainBagelyou are correct, only IBKR PRO, but that is accessible to retail traders, no need to be a prime account or hedge fund or even SMA. They have access to about 7 dark pools and you can route all or some of your trades exclusively there instead of using their SMART order routing system.
Good to know, disappointed I didn’t include this then. Thanks for the info!
@@ThePlainBagel IBKR could be the source for those 100 shares orders because of option contracts.
@@ThePlainBagel If you are an IKBR client living outside the US, you may only be able to open a Pro account, no matter your funds. This was the case for me.
Dark pool is Deadpool's investing cousin
great video - thx for making it easy to understand for non-day traders. love your channel
It is kind of convenient for large investors and inconvenient for small retail investors.
Your explanation helps, but the real intent was to help large traders not "dumb" money.
Super informative as always! Also, good choice of music for those sinister sections lol
You definitely have my sub. This content is next level. For me Eledator was the turning point. Please keep doing what you do and keep being you, love it.
Soooooo good and interesting. OTC deals were something I had never completely figured out. Now I do. Many thanks!
Love your videos Mr. Bagel lol. I have recently found a passion for investing largely due to your channel and really just want to start exploring the markets and researching companies. Not necessarily to invest money right now, just to analyze the business and things that go into its financial position (and hey maybe I can become a strong investor from learning from that perspective). Would love a video going over key things to consider when looking over the financials of a business or even what constitutes whether it’s a good investment or not. I know you don’t go into details on good stocks or anything, just personally I’m stuck with what to research when doing that analysis (equations, statements, etc. or maybe all of those things combined in some way). Love the channel!
Thanks 4 ⭐️ Reportage!
This was very informative! Perhaps you could do a similar video on after-market trading, with its pros/cons.
I love when the "conspiracy music" comes on during your videos. It's always on point.
Love the topic.
Good stuff.
Super interesting!
Great video
Great video.
Nice vid, I came fast and joyful
Hi Plain Bagel, I'm one of your long followers and love all your videos!
Super happy about your success after seeing your interview with our PM
I have a question:
Our interest rates had a cut yesterday.
Logically, banks should benefit from this.
But I noticed all the bank stocks were down yesterday.
Which sector benefits from cuts and which ones suffer from cuts?
Thanks!
Why should anything done with a security not impact the market? It's still demand for the company... The market is completely manipulated.
I know what a brown pool is. I once made the mistake of going for a swim after eating Taco Bell.
Wow had no idea about these pools !
Thanks a lot as it was very informative 😀
Thanks! I've been waiting for this for a while.
Thanks!
Do you find that your channel has some correlation with the ups and downs of the market?
What happens in the case of a limit or minimum order in a dark pool where the limit/minimum is not reached for part of or the whole order? Does only part of the order go through, or does the whole just not get filled?
I can see how an order for a large trade might be better filled through a dark pool in the case of a limit. If filled on the public market, the security might be artificially priced up or down or be prevented from going up or down with the expectation of a preorder. Only to have the trade never happen or only be partially filled because the limit or minimum was not reached for the entire order.
Not sure about the other markets but I was reading ASX documentation a couple years ago and I believe they can enter trades which will only execute when they can be completely filled
I encounter order flow bs as soon as I start entering my retail trade, before it's even executed! Often it runs up in price before I can even click buy. When this happens, I cancel the order, wait a few minutes and often get to buy it at the pre-runup price. I can see how orderflow frontrunning can be profitable because most people don't have the patience for this.
I'm assuming off exchange includes after hours trading as well? It is after all done outside of the open and public exchange.
@12:00 my thoughts exactly
So correct me if I’m wrong but it seems based on this explanation that they’re a tool for large corps to derisk themselves onto unknowing individuals.. so it makes sense why someone would want to sell into them but knowing that why would someone want to buy in the pool?
The problem with dark pools is that they are only in 1 state and we don't know which one and thus cannot hold them accountable even though I pay in another state. The structure of them legally is like the lottery where each state has them. So any dark pool accountability is likely based on the state you make the transaction. Swaps were the big thing that caused the government to bail out the US. The reason that congress said that they cannot regulate dark pools is likely because of how it is legally structured and knowing what state that dark pools exist in and where their SEC is will give the clearcut regulation as to where the swaps occur. Swaps and these dark pools are the biggest financial risk in America.
It is needed because large trades need to find a broker or it will tank the stock.
Interesting
I’m early!
Thank you!
Does daily volume count in the darkpool trades?
Dark pools is basically stock trading on incognito mode
A high percentage of GME trades are all OTC. Don't even go to lit market
Just dumped my 3k gme shares at 46$, finally out of the cult...
Good job, that shit isn't healthy
Joke’s on you, I unloaded at $70
Portnoy
On the point of large volume trades, wouldn't a limit order mitigate changes to the market? If traders saw a pending large volume trade and sold their positions, lowering the price, then the large volume trade wouldn't happen at all, right? Isn't there also the possibility of putting in orders that can be completed piecemeal rather than all at once?
Who decides when and how many buy orders are moved from lit exchange to OTC?
Whoever is submitting the trade decides where it gets filled - the institution investor has to actively submit a trade to the relevant platform. Brokers might choose between the two options on behalf of their clients based on whichever offers a better fill, albeit that's where payment for order flow raises a conflict of interest.
@@ThePlainBagel I remember seeing a post where GME orders were traded 70 ,80, or as high as 90% OTC during the recent high volume weeks. Is that high percentage of OTC orders normal in the market or an outlier?
Thanks!
@@bradthebad01 definitely an outlier, but could be reflective of high demand. It’s hard to argue what someone’s intentions are from the outside, but with such a volatile stock you could expect more HFT activity, which market makers might move to dark pools to avoid. Again, it’s hard to say
Avanza added this but its goes beyong the scope of EFT, index, stocks and bull/bear. But why dont insiders use dark pools? A CEO would get more protection in this case.
Now that we know about Darkpool... could you explain Deadpool, too?
It sounds like it helps to prop up the retirement industry and stabilize the overall market.
Bingo. Big institutions like pensions, 401k, and certain government agencies are highly reliant on dark pools via brokers. These institutions often have their own brokers going to the exchange and giving them data. Institutions get stocks at a discount. If pension fails, government cannot run its operations without employees. Pensions are extremely important for a functional government
Maybe the regulators should rebrand them as Stable Pools.
also not sure how this is any different than "iceberg" transactions where the system will automatically list another ask for N stocks as soon as N stocks are sold. same affect pretty much
The plain bagel is getting some sesame seeds on it with this video.
What’s to stop a customer of pfof from routing sell orders to a lit market and buy orders to dark pools?
Nice
It's not nefarious. The real intent is to make more money and lose less money due to how markets would respond to lit actions.
The thing is it ONLY benefits darkpool participants at the expense of everyone else. People who got the shares from someone dumping them wouldn’t know that they’ve been handed a hot potato. And since darkpool mainly facilitates large institutional investors, one could argue that it’s kind of elitist.
@@bloodyblase3074 oh yeah, my point is precisely that. It's the absolute barest definition of market manipulation. It's just... allowed.
Oh hey, I just watched a video on what happens to delisted stocks yesterday. Neat!
If i have to go through all the hoops and have my trades public for a public company theu should have to too
I got one of those in my chamber of schemes.
According to Gensler most of retail's trades are handled via dark pools. Retail trades, more often than not, don't hit the lit market.
How did you come to the conclusion that retail traders have no interaction with dark pools?
"Direct access"
Did i hear LIT exchanges? 🔥🔥
Really funny this guy. Started the video saying that dark pools were boring and not nefarious, and then carefully explained how dark pools are used to allow big institutions to dump their shares on retail.
Good explanation. I have no idea why this video is being treated as some sort of ape checkmate lol many of their sentiments are indirectly acknowledged in the video, some are indirectly countered.
ban high frequency trading or make it impossible by taxing the trades, so OTC trades would be also irrelevant.
I just saw this on my LVL 3 CFA curriculum, and I don't really think that is very... ejem... ethic?
So you are not allowed to trade in dark pools but investors can and will invest in them for you with your retirement. Got it
Would dark pools and the hidden trading processes explain why pltr had a great quarter but the stock price went down after the first quarter results were announced? Were retail buyers of pltr played by big institutional investors?
Dark pools dont change regular stock prices. Its litterally blocked off the regular stock market. Also pltr recently got big US defence contracts and if you have seen the trend of companies using AI getting boosts in stock value pltr is one of those companies.
@@homieinthesky8919 Pltr was probably around 23/share before the earnings call/announcement. Pltr announced a great quarter. Then the price goes down. Do you have any theories as to that odd price action behavior. Thanks in advance.
Pltr is gonna have a very good run for now
@@homieinthesky8919 The original commenter has a point. What explains PLTRs great quarter but lower price AFTER a great earnings call!!!!!
Anyone who cites dark pool transactions as part of their trade thesis is completely clueless.
Dark pools are great
It stops the annoying price changes when you sell or buy significant quantities
Takes vol out of the market. For vol sellers it really sucks.
Sounds like its only "great" for ridiculously rich people. Another barrier of entry for the normal investor and another advantage for the absurdly rich
Price changes happening when you go to buy or sell is the whole point of a public market... If you want trades to be private then they should all be private.
@@Nighthawk20000 you do realize that dark pool prices change by 10% each trade at times right? Do you think a regular trader would be happy when a stock they buy goes down 10% in a day? There is a reason why there are things called "market makers". Those are the ppl that provide volatility for the average joe on the regular stock exchange
@@savusilviulow volatility is a good thing
Dark pools should be illegal for publicly listed companies or any assets in the open market.
2nd
Man, I hate when I'm trying to sell and the price keeps going down before my order is filled.
Not sure how you can post about all these benefits when trading is a zero sum game. Who's losing out then?
Richard, man... Stop. Ruining. Conspiracies! I'll miss that ominous music when you will run out of these... 😢
BTW, what is that music? :D
They do sound shady.
Dark pool information is very important to long term investors. Look up the average hold time for US equities by institutional investors. It's only 2 to 6 fiscal quarters. No one is building up 10 year positions. This isn't the baby boomer hayday years.
Seems like he was talking about long-term investors meaning retail investors not institutional
"Allowing large trading houses to trade without affecting the broader market is great for every one!" Hard to fill trades are a feature, not a problem.
this bagel is gonna get creamed all over in a few weeks 📈📈
Dude says you might think dark pools sound like a benefit to bad actor but actually people are getting hurt by bad actors in the dark pools. What?
This is the US we are talking about. If there is a regulatory gap institutions will exploit it, and when it blows up in their face taxpayers will bail them out.
I believe they call it a virtuous cycle.
The market is always unfair if you're stupid or reckless, so get urself informed and educated, it's funny how ppl in the west complain about market fairness when the West is so transparent, Im frm SEA and here it's not as transparent and not as 'fair'
Complaining is how you get improvement. complacency makes it worse
Oh hey I'm early.
Hi early
From the man who sold you cdos
More than half of GME volume trades off the exchanges... Which greatly kills action discovery and by no means is a "small" trade.
Are you complaining that buys don't necessarily push up the price a lot?
off exchange trades get printed to tape within 10 seconds so there is no 'kililng' of price discovery
You mean it's not fair, rigged for the big guy.
This dude just glosses over FINRA and pretends Darkpools are regulated. He also overlooks how the lack of regulation is often used to move pressure from the open market. But whatever.
He got his cfa
He is going by every rule like everyone else who has experience managing other peoples money
Sounds a little bit about inside trading.
How?
No... trading off exchanges by market makers is fully okay.
Plus they're so irrelevant that volume is often 70-90% of daily trading of a stock.
Totally fine and nothing to see here. Please move on.
u get it lol, this shill is so comical... what a 🤡
So a 90s era exchange that is less regulated and mainly used by hedge funds isn't something to worry about?
Have you not listened to how they work?
@@tomlxyz I did, and feel I summarized it quite well.
You forget to mention about how they use dark pools when a stock gets halted on the way up...eg GME AMC than all of a sudden when trading resumes the stock falls 5-10 % immediately because of dark pool trading while the stock is halted...all in all it should be illegal as it taints real price discovery
he didn't forget it, it's purposefully left out. he is a total clown 🤡 & shill
I can understand if an individual or institution buys a ton of shares thru the dark web. But if a normal person like me purchases a share at the same time 100k other people purchase it, if the exchange routes our purchases through the dark pool without our consent then that supresses the buying pressure. That is price manipulation and indefensible. 💯
But that does not happen?
Why would the exchange route your purchase through the dark web when the exchange was made to facilitate that trade. They're already making money off you on the bid/ask spread. This makes zero sense.
@@tomlxyz it happened with AMC and GameStop.
That is not how anything works. Please go and take a course on market fundamentals
@@halohaalo2583 didn't say that's how it's supposed to work, but it's what happened. Even regulators agreed there were mishandlings. Just research it
Greta Brinkman.
It’s not about bbq.
1986
Posted a link in GME subreddit.
Enjoy views.
Thanks!
What. Have you done...
First of all, are you a sadist or trolling?
still sounds like another blatantly unfair advantage which exists only for the people who already enjoy every other blatantly unfair advantage to me
tell us why failures to deliver aren't a problem next
honestly if everything operated like a dark pool, there might be a lot less manipulation in the markets on a daily basis
Lmfao
I don't understand how hiding prices is allowed in a "fair" market.
Did you even watch the video?
@@DHAGSFU the comment was written 3 minutes after upload while the video is 20 minutes long. So definitely not
@@DHAGSFU I guarantee I understand it better than you. What's the point of supply and demand if you can hide both, especially when not everyone in the market has that ability edit: I think my replies are off. I can't even respond -- to answer whatever it is you say: the fact that the price can be hidden, no matter how long, defeats the entire purpose of the market. And only a select few people can do it which doesn't make it fair. Now what's your argument?
@@laserproofbecause ultimately price cannot be hidden for long. If the price at one venue is lower than another then a participant can just arbitrage and pocket the difference.
@@halohaalo2583 but you can still hide it though...
I got a dark pool you can swim in 😮
Don't delete this comment
@@JonJon-kx6xl did you just respond to yourself?
@@tomlxyz yeah people delete my comments all the time had to make sure he didn't
FFIE bros?
So that's how they avoid paying taxes
If dark web illegal, why dark pool can be legal?
Crimes happen there
You state dark pool are not for nefarious reasons... Then proceeded with telling us big institutions can potentially "reasons" for selling and buying shares without affecting price (price discovery).