What Do They Know That We Don't? Institutions Just Bet $18M On The U.S. Oil Fund Via Dark Pools

Zinger Key Points
  • Dark pools allow institutions to trade anonymously, without affecting an individual stock's price.
  • Retail traders can use the information, paired with option flow, to help guide their trades.

At 9:12 a.m. on Wednesday, Money Flow Mel (@MelStone31) posted an image to Twitter Inc TWTR indicating institutions traded large blocks of the United States Oil ETF USO over a dark pool exchange.

The Trades: At 8:07:56 a.m. an institution traded 111,000 shares of USO at $81.16. A few minutes later, at 8:10:41 a.m., another order for 111,000 USO shares went through at the same price. Together, the two trades amount to an $18.01 million bet on the fund.

USO was trading higher by about 1.7% at press time, putting the institutions who traded the stocks into the green, if the trades were a purchase of shares.

USO has retraced about 11% from its June 8 52-week high of $92.20 and on Friday, the fund was forming an inside bar pattern, with all of the price action taking place within Thursday's range. The inside is neutral in this case because although USO was trading lower before forming the inside bar, Friday's price action was taking place near the top of Thursday's range.

Traders and investors can watch for a break up or down from Thursday's mother bar later on Friday or on Monday to gauge future direction.

What Are Dark Pools? Dark pools (or black pools), named for the lack of transparency, are private, alternative trading systems, which allow institutional traders to buy and sell large amounts of stock anonymously and therefore without affecting movements in the market.

These exchanges were developed in the 1980s and as of February 2022, 64 dark pools were registered with the Securities and Exchange Commission.

The Controversy: The existence of dark pools hit the public psyche in early 2021, when GameStop Corp. GME and AMC Entertainment Holdings Inc AMC skyrocketed 1,041% and 624%, respectively, over the course of four days.

In January and February of that year, institutional ownership of GameStop shares was reported to be more than 100% of the float, indicating more shares were being lent out than what was available. Naked shorting, which takes place primarily over dark pools, was blamed for the discrepancy, casting the existence of alternative exchanges into the spotlight.

See Also: ExxonMobil Vs. Valero: Which Oil Stock Has A Stronger Bull Case?

Dark Pools And Retail Traders: Direct dark pool trading is reserved for institutional traders and investors, but after the meme-stock saga, retail traders became more aware of how to use data from the dark exchanges to guide their strategies. This resulted in a number of apps emerging to provide dark pool feeds.

Approximately 40% of all executed trades take place on dark pools, and when large blocks of individual stocks are bought or sold over these exchanges, retail traders can use the information to understand what “smart money” is doing. The difficulty with dark pool data is that due to its inherent confidentiality, the trades give no indication as to whether an institution is buying or selling the stock.

For this reason, retail traders can watch dark pool data for above-average trading volumes on an individual stock and cross-reference that information with option flow. If there is above average dark pool prints on a stock, paired with a high level of calls being purchased on the open market, it’s a good indication that institutions are buying over ATSs. Conversely, if large dark pool prints are followed by a large amount of open market put buying on the same stock, it can be assumed institutions are selling over ATSs.

See Also: Tesla, Aramco Called Out By Big Investors Over Green Reporting

Photo: Thaiview via Shutterstock

Posted In: Dark Poolsnaked shortingOiloil and gasCommoditiesMarketsTrading IdeasETFs

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