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What Are Dark Pools & HFTs?

What Are Dark Pools & HFTs?
July 2, 2020 Martha Stokes CMT

What Are Dark Pools & HFTs?

How They Are Changing the Stock Market

The retail news and professional news feeds offer extremely opposing perspectives on what is going on with stocks in short-term trading, liquidity, execution speed, and the overall internal Stock Market Structure. While the retail side of the news media focuses on basic news that it believes will encourage Retail Traders and Investors to buy stocks, the professional side concentrates on the actual viability and functionality of the market.

Dark Pools and High Frequency Traders HFT are at the center of most commentary on the professional side of the Stock Market. In one form or another, these two distinctly different Stock Market Participant Groups are at the heart of most issues. Unfortunately, most Beginner Stock Traders have never heard of these powerful groups or have been told plenty of misinformation about Dark Pools and High Frequency Traders HFT.

Dark Pools are the most important Stock Market Participant Group. They are the Institutional Investors for Mutual Funds and Pension Funds who control $100-120+ trillion and increasing, assets under management worldwide. Since the US has the bulk of the giant Buy Side Funds, it totally dominates globally with this group.

To put things into perspective, the World Gross Domestic Product is approximately $75 trillion, therefore the Buy Side Institutions hold more assets under management than the total Gross Domestic Product for the entire world.

High Frequency Traders HFT are companies that use computer programming to search for Dark Pool Quiet Accumulation, and then execute 3,000-6,000 orders per second, on the millisecond scale.

You as a Retail Trader, trade on the minute scale. The Securities and Exchange Commission excludes millisecond trading for Retail Traders. This is because High Frequency Traders HFT have the computing power of a multimillion dollar main frame with Cloud Technology hooked directly into US Stock Exchanges. Retail Traders do not have that kind of computing power.

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Why Are Dark Pools and High Frequency Traders HFT Allowed in the Stock Market?

Dark Pools are the long-term investors of the Stock Market and other financial markets. They are responsible for investing wisely for millions of Americans who buy Mutual Funds or who have a 401(k) or IRA pension plan with their employer. They take their fiduciary responsibilities very seriously.

Dark Pools are actually the colloquial term for Alternative Trading System Venues which are somewhat like an Exchange but without a Market Maker Limit Order Book. Without Market Makers Limit Order Books, the Alternative Trading System Venues are called “Dark” because there is no list of offerings for the bid or ask that are visible. The term “Pool” defines the vast quantity of liquidity that the Buy Side Institutions control, which is trillions of dollars.

The Dark Pools began back in 2005 as High Frequency Traders HFT had begun exploiting the large lot orders of the Buy Side Institutions using the Stock Exchanges. The Securities and Exchange Commission has determined over many years of study, that the Dark Pools do not provide a price advantage. Dark Pools use a specific type of order entry that is within the National Best Bid Offer. Dark Pools give the giant Mutual and Pension Funds a safe place to transact their business without the risk of High Frequency Trader HFT exploitation.

High Frequency Traders HFT are here to stay as well, but for a different reason. With the decimal system, which was enacted in 2002, spreads have shrunk to pennies or partial pennies. The fraction system provided much wider spreads. The original theory was that decimals would make the Stock Market “more efficient,” meaning tighter spreads than were possible with the fraction system.


Alas, any change has unexpected results. The penny spread created a low profitability scenario for Professional Floor Traders and Day Traders. This leads to a void of liquidity during the open hours of the Stock Exchange.

High Frequency Traders HFT provide liquidity with their Maker-Taker role. However, High Frequency Traders HFT rarely trade during the middle of the day, but mostly within the first 5 minutes of market open. Professional Traders have adapted to using a Swing Trading style, with End of Day to First of Day Trading. Whereas most Retail Traders are still taught the totally outdated 1990’s Day Trading style, when fractions were still in place. This leads to chronic losses or low income for Retail Day Traders.

Understanding these patterns with a Relational Technical Analysis™ method helps Technical Traders learn how sideways action is likely to end. Instead of guessing on which side the stock will break out, charts can reveal the dominant force behind the sideways price action.

Take your Technical Analysis to the next level to help improve your overall trading results by learning Relational Technical Analysis.

Go watch a webinar about Relational Technical Analysis™.

Complete training on Relational Technical Analysis™ is contained in the TechniTrader Methodology Essentials Elite Course.

Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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Martha Stokes, CMT is co-founder and CEO of TechniTrader. She is a retired professional Buy-Side Analyst and was awarded the Chartered Market Technician designation for her thesis, "Cycle Evolution Theory." Martha is a passionate teacher of the financial markets and a prolific writer, having created over 40 stock, option, and financial market courses.