Trade like the pros in dark pools

3월 30일

█ Trade like the pros in dark pools
If you're accustomed to trading on the stock exchange, you know that an exchange operates like a digitalized marketplace. Buyers and sellers gather around a stock and indicate what they're willing to trade for, hoping that two orders will match. Before you decide at what price you're willing to trade, you likely look at the order book depth. There, we see how many shares are seeking buyers or sellers at a specific price.



For a trade to be completed, the so-called spread needs to be crossed. The spread is the difference between the buying and selling price, in the example above 20 cents (226.40 – 226.20). In stocks that are traded very frequently, the spread is smaller and it's seldom a problem to execute very large volumes on the open market.




█ Dark pools simplify trading in small companies
Many stocks have too small a turnover to place a larger order without significantly affecting the price. Therefore, professionals have used dark pools for many years. Leading brokers are now making this flow available to all their customers. The advantage of a dark pool is that you don't need to show your order to other market participants until a trade has been completed. This facilitates, especially, trading in larger volumes.

Another advantage of dark pools is that trades are made at so-called midprice. Returning to the example above, a trade would occur when someone is willing to pay the full spread of 20 cents. Had the order book been a dark pool, the midprice would have been 226.30 SEK. In this way, it results in a better price for both buyers and sellers. For those trading in larger volumes, this can mean a lot of money.




█ All orders pass through dark pools
The fact that dark pools are now available to everyone does not mean that all orders should be placed there. In fact, there are several barriers to how much trading can be routed this way before the dark pool is temporarily limited.

When you place a regular order, thanks to so-called smart order routing, it will check if a better completion can be achieved via this dark pool than on the open market. So, whether you choose to actively place an order in the dark pool or not, you can benefit from the characteristics of the dark pool.

█ Shouldn't the exchange be completely open?
A criticism of dark pools is that they are exactly as they sound, hidden. But all trades made in Nasdaq Stockholm's dark pool are visible under completions. Stocks with low turnover can be difficult to trade without significantly affecting the price.

⚪ Let's take another example. Here we have a stock where the entire buy side corresponds to just over 130,000 SEK. That's a lot of money, but not an unreasonable holding for a private individual. This is also an order book from a company with a market value of about 1.6 billion. Thus, a small company, but not so small that trading for a couple of hundred thousand SEK should be unreasonable.

Here, the spread is also 30 cents. Which is over one (1) percent on this stock price. Being able to halve this cost can save a lot of money both directly and over time.

It is also possible to hide parts of an order today. In the advanced order placement on the open market, there is actually a tool for that problem as well. There, you can set the visible number of shares to be shown in the order book.

█ When you should use the dark pool
If you have never had problems with your order placement, you probably don't even need to consider placing an order in the dark pool. But if you trade stocks where you need to split your orders to not swallow too large a part of the order book, it might be valuable to try.


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Disclaimer
This is an educational study for entertainment purposes only.

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