The Mysterious World of Dark Pools in The Stock Market

Within the stock market, there lies a shadowy, mysterious world with a whole lot of secretive, morally-skewed players and strange, semi-illicit rules.. This is the world of dark pools.

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

This last year has been loaded up with speculation and a whole lot of strange happenings to inspire that speculation in regards to family-favorite stock: $AMC.

Today, we’re taking a deep and immersive dive into the world of dark pools and the peculiar happenings regarding AMC.

The Beginning: What is a Dark Pool?

Folks, this right here.. is a juicy one. Let’s start things off with, what I would call, an incredible, possibly groundbreaking question… What in the heck is a dark pool?

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

A dark pool is.. a private electronic transaction network, most often maintained by major financial and securities companies, where stocks are bought and sold by big-money clients of those companies. Because this darkened, matching of buyer and seller is done under the control of the bank, the bid, offer and sale prices are not published to exchanges. The “dark pool” title refers to the lack of transparency within these shadow-y realms.

Important note for you: Dark pool operators have the ability to route orders to public exchanges OR to their own private dark pool network, depending on availability, pricing and client preference.

Dark Pools Are Mysterious

Dark pools are shrouded in mystery, and with that: have been cause for a pretty thorough amount of speculation in the world of financial foul play. You may remember a very prominent showcase of financial foul play on January 28th of this year…

$GME & $AMC on The Week of January 28th, 2021

It was a week of thrills, a week of strong wills.. a week of pure, unprecedented excitement, because GME and AMC were on the verge of greatness. They kept breaking through every single door of “there’s no way” and “it’s too high” and “this is irrational” – We crushed those barriers and we still had room to climb. BUT as I’m sure you recall.. The morning of January 28th.. our power was stripped from our hands. Loads of popular major exchanges, most notably Robinhood and WeBull, shut down the ability to buy all these high speed, movement- backed securities. They took away the buy button, but conveniently kept the sell button. To say the least… It was a dark day…

At this point, it’s time we interested another character to our story. And if you follow this world decently closely, you’re familliar with this character.. Please welcome… Citadel

Citadel LLC is what most folks at this point would call a “villain” in our tale!

Who / What is Citadel LLC?

Citadel is an American financial powerhouse. This beast is broken up into two main parts:

  1. Citadel: The infamous hedge fund, and fun fact for you, the 10th largest hedge fund in the world ranked by assets under management
  2. Citadel Securities: The absolute largest market maker in the United states, handling a grand total of 40% of all stock trades that occur here

But wait just a second, there is in fact a third branch that makes up the bones of Citadel. And I bet you’ve never heard of it!

That branch would be: Citadel Connect. Citadel’s dark pool platform. Or… TECHNICALLY.. Citadel’s “Off-exchange-trading Immedate-or-cancel order platform” – Which, of course, makes it TECHNICALLY not an “Alternative Trading System” which allows them.. Fun fact.. To not be registered as an ATS, which means they don’t have to report their trading volume to FINRA, which of course, is overseen by the SEC. Hmmmmmmm….

Well anyway, I’m sure everything is fine. Morality is green. Everyone’s good people, right?

The Dark Truth About Citadel’s Dark Pool?

Well either way, Citadel was speculated to have been involved in January 28th’s chaos. The talk of the town stated that Citadel must’ve been the punch behind Robinhood’s decision to halt buys on the momentum stocks. That they had to do what needed to be done to save the shorters of the time, and so they put the power down on the Robinhood team to HALT IT UP and stir the waters of war.

This debate has been ongoing for a great many months now, but it’s also worth noting that, NOT A SPECULATION HERE, Robinhood does make up a majority of their profit from Citadel Securities by means of Payment for order flow. Which is the fancy way of saying profit a broker makes from a market maker for routing our trades to that market maker.

Let’s Take a Breather From Citadel For a Moment

ALRIGHT, that was a lot of info thrown onto you. But now you’ve got the scene. Citadel, Robinhood, AMC, GME, momentum, illusive activity, dark pools. At this point upon my journey, I had a big question…

Why do these Dark Pools exist? In the context so far, they sound to be BUILT on an evil presence… But what’s the positive reason for existence?

Well, folks; here’s the thing. Big institutions trade in big numbers. If these institutions make these massive moves on the open market, they would single-handedly move the whole market. This’d make things very expensive, fabricated and possibly time-consuming to accommodate. But in a dark pool, institutions can quickly, effectively swap massive orders without the market having any idea: So they can go by VWAP: Volume weighted average price. And so, they avoid single handedly lowering or raising the price as the orders go through.

But of course, with light, comes hypothetical dark. Especially when the pool is dark. It’s a dark pool.

This is the part of the show where we dive into the thickest of depths, because I researched this next portion with all my might… Let’s talk about the hypothetical bad in all this..

The Hypothetical Conspiracy Behind Citadel’s Dark Pool in Regards To $AMC

But most specifically: Let’s talk about what exactly could be occurring right now, right before our eyes: now and across this last year of intensity… In terms of AMC

AMC has a lot of abnormalities, folks. I’m a big fan of strange, curious, questionable, wild and generally interesting / inexplicable things in the world of finance: Thus is the nature of this channel.. So AMC falls right in line.

You know the thick of it here, but here’s a classic…. 🎵30-second-sum-up-with-chris🎵

  • In the last week of January 2021, short squeeze season was upon us. GME ran like mighty hell, followed by our beautiful little movie theater empire.. When a company on the verge of bankruptcy has a sudden 10x explosion within 22 days: there tends to be some casualties of the investment world left behind. Most notably: the short betters.. And you better believe AMC was tender with the touch of the shorts
  • Well, AMC had a legendary run, a save from the face of death, a wealth exchange of the masses, a movement like no other.. (except GME) – But before we knew it.. The fun run was over. AMC went from $1.91 per share – to $20.70 per share -> back to around $5 per share within the month.

  • Many believed the iconic short squeeze.. had squoze.. Until, something EVEN crazier happened.. In June of 2021, the fun began anew. AMC was given another taste of life, of thrills, of joyous potential!
  • It made it’s way back towards 10 – then 20, THEN even further- 30! 40! What in the holy heck? 50!! This son of a gun ran itself all the way up to 72.62 on June 2nd, suckling up every last headline YET AGAIN! The unthinkable.. To hit mainstream coverage, taste the momentum then do it all again!
  • In the last 4-ish months, $AMC has made its way downward a bit closer to tame once more. But all this to say.. Something still ain’t right..

AMC’s level of.. “shadow play” if you will.. Their “dark pool percentage of trades” is rising.. This.. is strange..

IN MAY/JUNE-ISH – There was an average of about 40% of all AMC trade volume amidst the dark pools.

AND THEN IN SEPTEMBER – IT was up to about 60% of all AMC trading volume being traded amidst the dark pools, with 40% traded in the light

In the last few weeks, dark pool volume percentage has touched 70%. I mean, that’s a pretty insane amount of trades being conducted in the shadow realm, wouldn’t you say?

But I mean… It sure sounds suspicious to see the dark pool volume rising, while the share price slowly trickles down, with the short percentage staying pretty much the same.

So let’s put our conspiracy caps on for a moment, if you will. Let’s call it, our “hypothetical, more paranoid-analytical-caps, perhaps.”

Immerse Yourself In The Hypothetical: YOU’RE The One Shorting $AMC

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

  • You’re shorting AMC. The retail heathens are winning. They’re trending on Twittter, they’re crushing you and you’re losing millions.
  • You’re desperate now. What in the heck are you going to do? This is a social movement now and you’re screwed. To close your short positiions now.. HA! You’ll be upside down hundreds of percent in losses, ya fool. So what do you do.. maybe.. You artificially apply pressure. But how? How would one? Well, in the dark pool, of course….
  • Every-time we can apply immense pressure at certain resistance points, by buying immense amounts of AMC shares in the dark pool, off the order book. No one will see that. But we’ll turn right around and sell those immense amounts of shares right on the open market, and you better believe that’ll show up on the order books. That’ll scare em. We apply enough artificially-created pressure, people will really start selling, and we’ll be back on top!
  • And if my fellow hedgies don’t have AMC shares for us to buy up in the dark pool, well fear not. Because, PERHAPS, in this hypothetical: We can just this once, naked short sell the shares event though they may or may not exist, it’s fine because no one will ever know. IT’S THE DARK POOL, BABY.
  • Now of course, this is all just a wild, biz are hypothetical. A mere piece of fiction is all! …. Or is it?

The Origins Of Dark Pools: Where Did The First Dark Pool Come From?

If our movie here is about Dark Pools, we need to sympathize with the character. We need to understand where they came from to understand the full scope here. We need THE ORIGINS, BABY.

Where did these darkened shrouds of mystery come from?

Well, I think for that, it’s best you.. IMMERSE YOURSELF.

The year is 1979.. Jimmy Carter is president

The stock market was in the midst of a pretty ugly year, the world is emotionally preparing for the 80’s; and on the morning of April 26th, 1979: the SEC put in place an shiny, new financial regulation known as SEC reg 19c3 — which a allowed off-exchange trading of securities listed on a particular exchange. This day was the birth of the dark pools.

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

It wasn’t till the thrill of the 80’s came along for investors to start actually utilizing the opportunity that was this new, secretive world of investing.. Big money-move investors began conduct massive block trading in these newfound dark pools, which finally allowed secret large-scale trades with NO market impact. Hot damn

1986 spawned the first real deal dark pool trading “venue” known as “After Hours Cross”

These dark pools evolved and continued their excitement for the years to come: and then in 2005, the beautiful boys & girls at the SEC passed Regulation NM<S (national market system) – which encouraged investors to discover a better price by bypassing the public exchange. And of course: this resulted in a LARGE number of dark pools coming into existence from this point forward. This led to the birth of juicy potential for high frequency traders especially.

The dark pools continued to grow in appeal ver these last 15 years, with little bits of changes and alterations for alleged “transparency”and whatnot: But in reality, they’ve become more prominent than ever before by far. The darks are like an invite-only secret society getting more and more members, hiding in plain sight..

Brokers and banks are leveraging dark pools for high net worth clients by finding the absolute greatest matches for them within the pools, and without any fear of spooking the markets in either direction.

Over the last year, about 45% of ALL use stock market trades were completed within the dark pools. Compare that to an average of 3-5% back in the 90s & early 2000’s. I mean, damn!

The $AMC Short Squeeze War That We’re In The Midst of

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

So now we find ourselves in the midst of the biggest dark pools conspiracy of all time. We can all agree that AMC had been through a mysterious year. And we can confirm that within these dark pools, in theory, large-money institutions, hedge funds, & market makers hold some real deal power.. And we know Citadel has a lot of interest on the side of the big money short-selling AMC, rather than on the side of the retail folks buying shares. Also we KNOW that citadel is the biggest market maker in the world AND controls a massive dark pool in the world too.. OH AND AND AND- We know Citadel buys a large portion of Robinhood’s orders ‘ Payment For Order Flow – So in theory, to say Citadel leverages their control, their purchased order flow from Robinhood, by sending buy orders straight to the dark pools and sell orders straight to the open markets to increase AMC sell pressure: it’s not that crazy of a theory, folks.

So Then.. What Comes Next? How Do You Win Against a Dark Pool?

Well.. The war continues on. The fact of the matter is, these dark pools are mysterious places. Lots of legitimate things occur within them, but now, it seems the illegitimacy and sketchy practices are rising.. So what the heck saves the day? How do retail investors win How does AMC win??

The clearest solution, in theory… Is to ban dark pools from the US stock market. We’ve seen plenty of dark pool manipulation cases in the past, so we know moral mishaps are in the realm of possibilities: But like we’ve mentioned, dark pools are also theoretically supposed to have a strong good side. If Berkshire Hathaway decided to close out a position of there’s, proceeding to sell off millions of shares: that would artificially TANK the company on the market that day, and that ain’t good either.

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

So perhaps more SEC regulation is the need here. Maybe. That sounds sweet, doesn’t it. Well unfortunately SEC regulation has been implemented on a whole lot of fun aspects of the market in the past, and if you can imagine: it hasn’t always gone amazingly.

Well, maybe then: The solution is to officially ban payment for order flow. If these smaller brokerages are bannister from selling our order information to the market makers, the citadels of the world: perhaps that will change the game, because they can no longer manipulate retail orders into dark pools and order books depending on whichever way benefits them. But then again, these market makers still hold a whole lot money and a whole lot of power. So do you really thing the banning of payment for order flow is enough to take away their ability to control the way these dark pools are used?

So the real answer is.. I don’t goddamn know. How could I? I’m just some guy, okay?

This is an immensely complicated issue: in the realm of a subject that’s very loosely understood. These dark pools are drenched in secrecy, people. Every possible solution has a possible downfall right next to it, so thank god they don’t give me the power to fix this..

But I’d say there’s something that needs altering amidst these mysterious pools of dark, because there’s a whole lot of big questions that will eventually need some answers.

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

Thought either way, friends… That right there is my take on the overview of this cold and eerie world of dark pools within the shadowy realm of the stock market..

In Conclusion..

I hope you enjoyed our deep dive together today. Please -oh- please, comment and chat about it all! I love to talk about this stuff. So I’d very much love to hear what your take is on all of it. Is there a solution? Am I a mis-informed idiot? Is $AMC still a rocket waiting for takeoff? Should Citadel & Ken Griffin be boiled publicly in a big cauldron? Let me know!

What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market

Thanks for reading through this week’s juicy tale from the world of Money Lore!

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Thank you so much for reading my take on the story. This has been.. “What is a Dark Pool? The Mysterious World of Dark Pools in The Stock Market.”