Tuesday, April 9, 2013

The Expanding Roles of Dark Pools

MetaStock SPRS Series - Week 113 - TechniTrader® Stock Discussion for MetaStock Users - The Expanding Roles of Dark Pools - April 8, 2013
By: Martha Stokes C.M.T.

Most retail traders are of the opinion that Dark Pools somehow harm their trading activity. This is because most retail traders do not have any working knowledge or access to reliable information regarding this off-the-exchange or Alternative Trading System, aka ATS, in the professional world. As I prepare the High Frequency Trader HTF & Dark Pools Elective Course that will debut this month at technitrader.com I am finding more inaccurate information about Dark Pools on the retail side news feeds than truly accurate data and information. This is unfortunate because unless retail traders have access to facts and correct data, they will be acting upon inaccurate data which will ultimately harm their profitability and success in the stock market.

One fact you must know is that Dark Pools are NOT going to go away. There is no way that the giant funds who control trillions if not quadrillions of dollars in the financial markets, are going to allow that to happen. But what every retail trader needs to also know is the Dark Pools are actually a huge advantage to you. Since the bulk of the mutual funds, pension funds and even sell side institutions do not use technical analysis much if at all for individual stock analysis, using technical analysis to find these institutions’ buying and selling footprints gives the retail trader a huge advantage.

Just last month, the SEC proposed the Systems Compliance and Integrity Regulation. And many retail articles wrote rejoicing phraseology about how this finally "controls Dark Pools." Actually, it safeguards Dark Pools. What the SCI does is it creates a standardization of compliance and integrity to all transactions no matter where those transactions are conducted and executed. The volumes traded in Dark Pools have risen by 50%. It is NOT that Dark Pools account for 50% of all transactions in the markets, it is that they have INCREASED by 50%. This is a confusing detail for many retail articles. Dark Pools do not represent 50% of the total volume of the markets, far from it. But they are a huge force to be reckoned with as they move so much money, and control far more than half of all the outstanding shares of stock in the US financial markets.

The SCI requires that exchanges, ATS, all clearing houses and order completion, as well as transfer venues for market data to have hardware and software technology that meets certain SEC standards. In addition all of these various market venues must conduct "business-continuity" testing, and are required to notify the SEC regarding disruptions and technology problems or issues. Technologies must provide robust processes that can withstand the pressures of a highly stressed financial market that is moving at the speed of light. Correlation across all financial markets is a requirement and insures stability of the financial industry. The US is still the largest financial market in the world and that will not change any time soon. The US has the largest corporations in the world and has the largest investor base in the world.

The SEC is determined to protect that status, and this is the essence of Dark Pool regulation. It brings the standards of the Exchanges to the ATS and other Dark Pool Venues. It establishes a foundation for consistency and a backup fail-safe system, to ensure the overall strength and integrity of the financial markets. So no, the Dark Pools are not going to be forced to trade against the High Frequency Traders on the exchanges. No, they are not going to be forced to expose their proprietary intellectual property Algorithms or Quant-based formulations, or their investing strategies. Those corporate secrets are as protected as any corporations would be under the laws of the US. Most retail traders are still using utterly outdated "trading systems" that employ indicators as signals or worse the red/green arrow signal systems. By incorporating indicators like TTQA TechniTrader® Quiet Accumulation that expose Dark Pools, they are easily recognized if you understand how, why, when, and where they buy and sell.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.

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