There are essentially only three kinds of traders in the world:
- Price-informed traders (discretionary investors, e.g. dark pools),
- Supply-informed traders (e.g. market makers and dealers), and
- Uninformed traders
Dark pools are price-informed investors that allocate capital based on research related to future economic projections.
MMs are supply-informed investors who adjust their positions in response to changing demand for liquidity. When supply-informed investors receive information that indicates that there is little liquidity trading, they trade in the same direction as informed traders which accentuates price moves. Only supply-informed MMs have the ability to absorb liquidity (selling) trades.
Uniformed investors have few signals other than what they can infer from current price action. By and large, they are chartists. (No offense intended; this includes most of us.)
In the image above, I’ve filtered last night’s dark pools’ data for high buying and high selling volume.