A little known fact to most investors is that a modest percentage of all trades, also known as dark trading, occur off the main exchanges i.e. New York Stock Exchange and the Nasdaq. Institutional investors who want to hide their bid or ask stock quotes from public view send their orders to private venues, also known as dark pools, run by companies such as Citadel Securities. These companies execute the trade for the investors for a fee and only report the trade after the execution is completed. As such, the broader market cannot see what the stock is worth and how it is priced until the trade is completed.
When the volume is small, the impact of dark pool trading is minimal. With the recent rise of trading in platforms such as Robinhood, off-exchange trades are approaching almost 50% of total trades in any given day. And hence, the massive volatility on stocks like Gamestop and AMC where much of the trading happens behind the scenes in these dark pools. Investors trading on the main exchanges only see the massive price movement after the completion of the trade and end up scratching their head wondering why they did not get the price quote that they entered on their screen.
Future Wealth’s View
Most other countries such as Canada and European Union do not permit trading outside the main exchanges and the primary reason is lack of transparency and a secondary reason is to keep transactions cost low for the average investor. With volumes as high as it has been recently, it is only a matter of time before the SEC clamps down on this esoteric maneuver adopted by hedge funds and other large institutional funds.
This concept of off-exchange trading is another reason to stay away from day trading or attempting to time the market. Anytime an average investor thinks he possesses insight that no one else has and is confident that he can beat the market in buying a stock, it may be wise to consider that the money has already been made on the other side of the trade by those dealing in the same stock in these dark pools. That somber realization will hopefully limit further losses for the average investor in future. Or will it? Just ask those who are still trying to unload some of their Gamestop and AMC shares.