For every available stock, SpotGamma has constructed a Dark Pool Indicator (DPI) which measures buying and selling activity in Dark Pools. Can Dark Pool activity predict stock returns?
Here’s what we know, based on aggregated S&P 500 data going back to January of 2018:
- When the DPI is >45%, stocks have a positive return over 5, 20 and 60 day time frames
- When the DPI is <30%, stocks have a negative return over the next 20 and 60 day time frames.
Get started with a five-day free trial to SpotGamma Pro and see the Dark Pool Indicator in action for every available stock.
What Are Dark Pools?
Dark Pools are private exchanges generally hosted by large brokerages.
They are called Dark Pools because access to these venues is determined by the owner(s) of the dark pool. Typically hedge funds are the primary groups given access to this dark pool liquidity. This is in contrast to public exchanges (or “lit” exchanges) which are available to all traders.
Hedge funds will often chose to trade in Dark Pools as it limits visibility into their activity. This can be advantageous if, for example, they are building a large position in a thinly traded stock. Because they are buying in a Dark Pool, their volume will not be as visible as if they were transacting on a public exchange. This may prevent other traders from detecting this buying.
Transactions in Dark Pools are generally not made available to the public in real time, but FINRA (Financial Industry Regulatory Authority) requires all dark pool transactions to be reported each night. These reports are then made publicly available.
Can Dark Pool Activity Predict Stock Returns?
For every available stock, SpotGamma has constructed a Dark Pool Indicator (DPI) which measures buying and selling activity in dark pools.
When the DPI is >45% it indicates strong buying or accumulation of a stock.
In contrast, a DPI <30% indicates large funds are selling their shares.
In the table below we’ve aggregated data for all individual stocks in the S&P500, going back to January of 2018.
Under the column “All Days” you can see the average 5 & 20 day return for all stocks, regardless of DPI. Following that we broke down the forward 5, 20 and 60 day returns for various DPI readings.
We only select those time periods in which the average for the last 5 days (row 1) or 10 days (row 2) was greater than the column group header.
For example, the data under the “DPI>45 column” and first row “5 day average DPI” shows the forward 5, 20 and 60 day returns following periods in which the 5 day average DPI was >45%.
What you can see is that when the average DPI is >45% stocks have a positive return over 5, 20 and 60 day time frames.
However, when the DPI is <30% stocks have a negative return over the next 20 and 60 day period.
If you look for “extreme” buying with a DPI>60%, it doubles across all time periods.
SpotGamma’s Dark Pool Indicator Dashboard
Here’s what SpotGamma Pro subscribers will see with access to the SpotGamma Dark Pool Indicator Dashboard:
For a five-day free trial to SpotGamma and to see all the Dark Pool information in action, subscribe now!