How to Trade in Dark Pools

Dark pools are private exchange venues used primarily to facilitate large block trades between institutional investors. They are designed to prevent large orders from influencing market prices by allowing big traders to transact directly and anonymously, bypassing the public order book. Bid and ask data for dark pools is not publicly available, hence the term “dark.”

Dark pools are primarily used by institutional investors, but that doesn’t mean retail traders can’t benefit from them. The routing technology of the best online brokers allows them to use dark pools if they have better fill prices. Some trading platforms also offer tools to view and analyze completed dark pool trades, giving clients insight into what major market players are doing. Below, we explore exactly how dark pools work and how you can make use of them. 

How Dark Pools Work

Imagine a large institutional trader looking to sell millions or tens of millions of dollars’ worth of shares. Putting such a massive order on the public exchange may cause a significant move in the underlying stock. To avoid that, the trader can simply look for another trader willing to buy the entire position (or a big chunk of it) on the spot. This is exactly what dark pools are for: They are private trading venues that match large buy and sell orders between major market participants. Their bids, asks, and volumes on offer aren’t publicly visible, specifically to avoid disrupting prices on the open market. 

Using Dark Pool Data in Trading Decisions

Basic trade execution data, like share size and price, is reported on the consolidated tape shortly after a trade occurs, but detailed information is released only after a two- to four-week delay, depending on the stock.

Since dark pools are used primarily by institutional investors, the detailed data of such trades may offer insights into what big players are doing. Seeing repeated dark pool buys or sells in a stock may signal ongoing accumulation or divestment of a big position. Additionally, when dark pool data coincides with key support or resistance levels, traders can strategize how to trade around those levels.

Other clues traders look for might include iceberg orders (where only a fraction of the order is fully tallied) and clusters of large block trades that match up with technical strength or weakness. Studies such as relative strength index (RSI), volume trends, or moving averages of a price can complement dark pool data and be used to devise a strategy. It’s important to note that even the detailed dark pool trade data does not paint a full picture. The data needs context and interpretation.

Tools for Analyzing Dark Pool Data

In April 2024, tastytrade, Investopedia’s choice for best options trading platform, became the exclusive brokerage firm for one of the most powerful platforms for analyzing dark pools, Unusual Whales. Unusual Whales provides real-time alerts for dark pool activity and large block trades. Thinkorswim, offered by Charles Schwab, also offers limited visualization of block trades and FINRA’s Alternative Trading Systems (ATS) transparency data.  

TradingView and TrendSpider, two excellent stock screener and charting platforms, enable users to code scripts and indicators. Some traders on those platforms have generated and shared scripts that flag trades with signs of dark pool activity.

Retail Trading in Dark Pools

Retail brokers generally don’t offer direct access to dark pools. However, the best online brokers use smart order routing systems that automatically seek out the best execution across various venues, including dark pools. As a result, retail brokers may bundle orders from multiple clients and execute them in the dark pool, allowing retail investors to benefit from the additional liquidity, often without realizing it. Interactive Brokers, Fidelity, and Charles Schwab all use systems that may tap into dark pools.     

Key Considerations of Dark Pools

Dark pools are very efficient for large trades, but they also come with limited transparency. Traders can’t see the order book, making it harder to assess real-time supply and demand.  Additionally, even detailed dark pool trade data paints a rather limited picture. It may provide insight into what happened a month ago in the stock, but it likely won’t reveal why it happened. Traders need to find other sources of information that may confirm or contrast dark pool data.

The Bottom Line

Dark pools play a quiet yet vital role in the trading ecosystem by allowing big investors to efficiently execute outsized trades without disrupting the broader market. Although primarily designed for institutional use, top-ranked brokers allow retail traders to benefit from the additional liquidity of dark pools. Detailed dark pool trade data, even if made public a few weeks after trades occurred, can also provide valuable insights into the actions of big players.