‘Dark Pools,’ Low Liquidity Cast Shadow on the Rally

Trading techniques could help undermine the market's stability

    View All  

Why does this matter? Well, because it allows you to make your trades without tipping your hand or moving the market. In a low-volume environment, it is increasingly likely that a block trade could move even a fairly large stock. This is a way for big firms and their best clients to protect themselves and play by a more favorable set of rules.

Another disturbing aspect of dark pools is the anonymity they provide. While some traders are lured by the fact that other investors cannot see the trades executed and prices agreed upon, a small group undoubtedly is drawn in by the idea they their personal identity is just as opaque as the substance of their orders.

To be clear, dark pools eventually report volume back to the major exchanges — they have to, since the transactions get resolved as “over-the-counter” trades. But detailed information about the volumes and types of transactions isn’t there, and the true impact on the public market doesn’t happen until the trades have long been resolved.

What Is ‘Real’ About the Rally?

When you consider these troublesome developments in trading, coupled with the basic admission that investors remain largely scared out of the stock market and volume remains at record lows, it is difficult to imagine the rally will continue much longer.

The seasonal “sell in May” phenomenon might just be an old wives’ tale, and there are plenty of cautionary tales that prove market timing doesn’t work. Had you sold in May 2009, for instance, you would have missed out on one of the strongest rallies in history.

But there are many reasons to fear this summer’s typical low-volume lull. The bottom line is that liquidity remains very weak, and that is unlikely to change anytime soon.

And in a low-volume stock market, it only takes a few bad headlines or a handful of panic sellers to tip the market into a full-fledged bearish move.

I hope that doesn’t come to pass, since the market needs some stability after a choppy 2011 and the alternative of Treasury bonds offers returns that barely keep up with inflation.

But you can’t hope your way into retirement. Protect yourself with stop-losses and keep an eye on market volume as we approach the dog days of summer.

Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/dark-pools-low-liquidity-cast-shadow-on-the-rally/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.