How To Trade With The Hidden Liquidity Of The Stock Market

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This is a continuation of the article published last week, The Hidden War within the Stock Market.

The internal structure of the Stock Market is largely invisible to the average investor, retail trader and small fund manager groups. The vast majority of giant-lot transactions do not occur on the public Stock Exchanges, ECNs, or other public venues that retail day traders use.

Most of the large lots, which are 50,000 900,000 shares, and Block Orders, which are 1 million to 20 million+ shares, are never seen on any public exchange or Level 2 data.

The realm of the Buy-Side Institutions are Alternative Trading Systems (ATS), trading venues commonly referred to as Dark Pools of Liquidity. The term Dark refers to the fact these venues are Over the Counter, meaning they have no market maker limit order book and do not appear on the public exchanges. The term Pools refers to the vast quantity of shares of stock that are bought and sold daily. Anywhere from 35% to 50% of the total transactions each day are transacted on these Dark Pool ATS venues. 300 billion dollars of stock transactions occur every day. That number is consistently climbing year over year.

There are, at this time, 50 ATS venues where Buy-Side Institutions quietly accumulate shares of a company to avoid any market participant group front-running their orders.

The SEC approved the ATS Dark Pool venues back in 2002 as the market pricing structure changed from fractions to decimals. These venues have been a part of the market for over 20 years. Each year the number of transactions increases on those venues.

This is a problem for retail traders as they are unable to see all of the transactions that are going on during the trading day, even via Level 2 data. Only occasionally there are a few whales, as the retail side sometimes calls large lots over 50,000 shares, but what is visible is just a snippet of data rather than all the large to giant lots that are occurring on the ATS venues.

Why should this matter to traders and investors?

Because such huge quantities of stock accumulation create a steady slow liquidity draw which professional traders can track using Relational Technical Analysis that identifies the accumulation using Leading Hybrid Indicators. When professional traders see the accumulation via large-lot indicators, they start initiating additional buying that then triggers High Frequency Trading orders just ahead of market open. Most big gaps at the open are caused by HFTs in the Maker/Taker role as they fill the queues with small-lot orders before the open. This causes the computers of the market to adjust prices up or down seconds before the market opens.

Retail orders are executed at the open and the price gaps, either up or down. Most retail losses are due to a system that the retail trader doesnt understand.

When a Buy-Side Institution is buying millions of shares of a stock, they must do so over an extended period of time so that they do not disturb the price trend. Or, they buy block orders of over 1 million shares directly from the corporation. Even though the price of the stock remains in a sideways price range while they accumulate, the accumulation of the Dark Pools is the initial trigger for a momentum run, sometimes several. When retail traders are able to identify a quiet accumulation phase via Relational Technical Analysis using Leading Hybrid Indicators, it can give them the ability to identify quiet accumulation and buy stocks before the HFT runs and gaps. This way of reading stock charts can provide the trader with an edge that yields higher profits for swing trading, day trading, position trading and long-term investing.

Consistent profitability trading stocks requires a knowledge of where and when Dark Pool hidden accumulation is going on. That requires the ability to recognize the large-lot transactions on stock charts, aka Relational Technical Analysis. Traders can then watch for the Professional Trader setups to get in at the beginning of momentum runs and uptrends rather than at the end.

The Dark Pools create Buy Zones, which can be identified on a stock chart. Typically, the Buy Side Institutions are slowly accumulating large lots over time with a controlled bracketed order within a narrow price range. Indicators that identify hidden large-lot accumulation confirm the Buy Zones. Professional traders buying starts the initial momentum runs. HFTs often conclude the runs with gaps and sudden reversals due to their selling into retail traders buying LATE in the run.

When a retail trader or investor can trade with the professionals rather than against them, income from trading stocks can be more consistent. This comes with a thorough understanding of how Dark Pools create the foundation for momentum runs, the patterns created by their accumulation and the professional short-term trading that tends to follow. Then, buying and selling at the right time becomes simple. This is the benefit of learning what I have coined Relational Technical Analysis.

Many feel the market is against the little guy because the Dark Pools are off the exchanges, not lit for the trading public to see. However, it is actually to your benefit. When you know what to look for, you can piggyback off the professional traders activity.

Martha Stokes, CMT

TechniTrader has been teaching traders and investors a complete process for trading or investing in the stock market and other financial markets since 1998. We have helped over 500,000 traders and investors achieve their financial goals. Our courses provide a complete, comprehensive training program based on a college-style curriculum that uses a tri-level approach to analyzing assets or derivatives to trade.

This post contains sponsored content. This content is for informational purposes only and not intended to be investing advice.

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