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We are delighted to welcome our permanent member, Gilbert “GMan” Mendesa. GMan is the main trader in proprietary-a world-class firm SMB Capital. Reading the tape is a trading skill, which many emerging traders lack. This skill helps professional day traders gain an edge over the competition.. In this way, on Wall St. Cheat Sheet we want to give you the opportunity to see, how proprietary-the trading company uses this skill, to improve your trading. Gman will be our guide. His column “Reading the tape” will be presented at Wall St. Cheat Sheet every second Friday.

In addition to high frequency trading, dark pulam and other issues, on duty in the trading world. I caught up with Gilbert “GMan” Mendesa, to ask him how dark pools affect traders and what steps we can take, to adapt to them.

Damien Hoffman: Firstly, GMan, can you explain what dark pools are (Dark Pools)?

GMan: Dark pools are sources of liquidity, accessible to institutional or other, big day traders. This is the path for large orders with a target from inter-institution trading as an alternative to large order execution. – think more 30.000 Shares – on the open market.

Damien Hoffman: Most people think, what orders of dark pools – these are hidden order books. It really is?

GMan: Not that, to keep them hiddenwith my order books all together. These orders are simply kept in a separate ledger., available only to topics, who have deep pockets and need to trade large blocks of stock. I like the name of dark pools – big money ECN.

Damien Hoffman: How it ensures fair and transparent bidding?

GMan: Same way, like any other ECN as such, they support fair and transparent bidding for all, who has access to them. For most of us, these are just minor inconveniences.. Dark pools only suck some liquidity at our disposal, active traders – that's why they (perception pool) uncomfortable, and not because I can't tell where the big liquidity is.

I will not deny that, that a very small part of my game is getting before these orders, to create a spread – literally making a few cents per trade. But since this is such a small part of my income – less 5% – then I do not lose sleep because, I can't see those orders. Big money for me – it is identifying strong or weak stocks and creating a big move. When, reading the tape, I feel a big order, going to market, i try to define, How long does it take for volume to enter an order from readily available ECNs?, dark pool, or together.

Damien Hoffman: Can you suggest, how individual traders should work with dark pools?

GMan: I am a trader. My job – look for signals, to earn. I have developed excellent trading skills over the years. Programs, perception pool, algorithmic programs and the like just require some trading adjustments. I still find ways, to make money. I am pleased to, that some, of the above will be removed from the market, but if they all persist, I will still be a consistent profitable trader.

Traders must accept dark pools and find ways to trade with them. They won't really go anywhere.. Like a trader, I could argue endlessly about, that this area is not equal in rights. But I don't take money from the market, complaining or listing all of its faults. I take money from the markets by adapting and looking for signals, to earn.

When it comes to dark pools, I just use the large trading volume of these liquidity sources as an indicator or hint., that some big institutional guys are jostling around the volumes. These prices, on which transactions take place, tend to become very important.

Damien Hoffman: Can you give an example?

GMan: Let me tell you about the scenario, which the, as i saw, happens often. I like to call it “Program, trapped”. This happens a lot in stocks, who are very in the game, which means – huge volatility, good volume, tight spreads, and big traders, pushing around volumes.

Suppose, I trade the stock as it approaches support at $11 and it looks impressive at all time intervals of the charts. When the stock broke through support, I saw by $11.03 ARCA, holding ask, which repeated the seller at the same price, but small volume. It indicates weakness.. Now imagine a big bid on $11, who is beaten aggressively. Bid goes down and now ARCA goes down – on $11, as a result of which the stock looks very weak. Suddenly, in a few minutes, large white print in 100.000 shares goes by $10.99. Not surprising, no more ARCA orders by $11 or $11.03. The stock is bursting up. This level by $11 now becomes a significant and good entry point for a long position next time, when the stock goes down (to this level).

so, in plain english, promotion goes back to places, where there is consumer interest. Aggressive seller thinks, that the stock must trade below, so it goes back to selling in close proximity to support. He makes others believe the same., and they consume a big customer on support. Being confident that, that the stock can now start moving down, the seller drops below and sells a lot at the previous support price. Then out of nowhere – in what sense, dark pool – another institutional player prints a huge volume below support. ARCA seller understands, that there is still buying interest around these $11, so it rises. And the stock is moving away from this support level very quickly..

Understandably, that the trader will be pleased to see a large ask in the book, so that we can add to the short position. But as a tape reader, I will learn to consider all the different possibilities about, how a stock can be traded, based on that, what do you see in Level2. Due to the 3D print below, where we see an active seller, I am not comfortable in my short position. It makes me think, that the seller will fix in the stock above, when his print will be accepted by the dark pool.

Damien Hoffman: Gman, thanks for this preliminary tutorial on dark pools! We are glad, what do you contribute to our site and continue to do Wall St. Cheat Sheet valuable place for traders and investors.

GMan: Thanks for the opportunity. Team SMB also glad!