The Dark Index™ (DIX™) is a dollar-weighted measure of the Dark Pool Indicator (DPI) of the S&P 500 components. When the DIX is higher, market sentiment in dark pools is generally more bullish. When the DIX is lower, it is more bearish or uncertain. The 2 year DIX is used as an indicator of dark pool short volumes as a proxy for buying activity opportunities.
In the violent sell off and reversal of the first week of December (2021) note two things on the 2 yr DIX above:
- The sharp fall to the lower reaches of the GEX (orange/pink)
- The positive divergence of the DIX (blue) to the S&P 500 (green)
A key part of the KnovaWave trading system is crowd psychology and we incorporate the DIX in telling us where the dark pools are, short is long as we see with Sqzme. These indicators coupled with our Murrey Math, Ichimoku and Babson components help us pin point supports and opportunity. Fractal recognition of DIX and patterns with option gamma levels are a very powerful indicator and improve the probability and therefore lower risk of a trade or investment.
SqueezeMetrics Research (Sqzme) developed the The Dark Index™ (DIX™) and has chronicled, in dollar-weighted terms, dark pool short volume across all components of the S&P 500® since 2011.‡ Because the index is dollar weighted, volume is multiplied by share value, giving more weight to larger and more frequently traded stocks.
- To See the DIX visit: The Squeezemetrics Monitor here
In a Research Paper “Short is Long” From March 2018 Sqzme makes three key conclusions:
Why Short Is Long
A short sale is the sale of a security that the seller does not own. Traditionally, short sales are associated with speculation―traders betting that a stock will go down however every time a market maker sells a stock it is going short. Short volume is actually representative of investor buying volume.
Whenever a market-maker fills an investor’s buy order, the MM is facilitating the trade by shorting shares. Thus, short volume is actually representative of investor buying volume, and non-short volume is representative of investor selling volume. It’s no coincidence that short volume is predictably half of total volume―short sales represent the buying
half of the market, and long (non-short) sales represent the selling half.
Testing the Hypothesis With Freely Available data
Ever since 2010, FINRA has collected short sale volume data from their Trade Reporting Facilities (TRFs).† The TRFs receive data from exclusively off exchange, or “dark,” venues. Some of these venues are Alternative Trading
Systems (ATSs), or “dark pools” and some are “internalizers.” Since our analysis doesn’t need to distinguish between types of off-exchange venues, we’ll refer to all data from the TRFs as “dark pool” data.
The only thing that’s “dark” about a dark pool is that there is no pre-trade data, i.e., there is no visible order book or quoting. The one thing that’s particularly appealing about dark pools for the customer is that you can buy or sell stocks between the bid and ask prices, usually at the midpoint. This can dramatically reduce trading costs.
For a market-maker in a dark pool (don’t be fooled, dark pools have MMs)‡ this only changes one thing―midpoint trades mean spreads become even tighter (it’s sub-penny). But for our purposes, this is irrelevant. The rebate is
still king, and the MMs will still buy what’s sold to them and short sell what’s bought from them, just like they do on the lit exchange.
With all of this In mind, the only suitability concern about using short volume data from dark pools as a proxy for the whole market is that it just isn’t enough data. Fortunately, off-exchange volume accounts for about a third of all trade volume. This should be more than enough to get a picture of the correlation between short volume and intraday stock gains―if there is one.
Extrapolating
The studies show that DIX tends to rise into corrections, we are left to believe that it reflects a broad willingness of investors to accumulate S&P 500 component stocks at lowered valuations, and that high levels of short volume correspond to positive medium-to-long term investor outlooks. Sqzme says that this has certainly been reflected in the data.
The following scatter plot illustrates this relationship between DIX and S&P 500 returns.
Very high relative percentages (≥45%) of dollar-weighted short volume are associated with mean 60-market-day returns of 5.3%, as compared to a mean of 2.8% across the whole dataset.
Source: SqueezeMetrics Research Paper
From The Traders Community Research Desk