LIT Markets – Light Pool Markets

A LIT market, or light pool market, refers to ECN stock exchanges where the order book is made public for all who subscribe.  A LIT or light pool market will allow traders to see the amount of liquidity that is posted on the bid and offer of the order book for a security.  A trader will use the information that they see on the LIT markets as an indication of the stocks likely near term direction.

On the other hand, you can take a look at what dark pools are.

A majority of volume still transacts over the light pool markets.  According to a recent Wall Street Journal Article, about 70% of volume is transacted in the LIT markets.

It is easy to spot a large buyer or seller when they post orders to LIT markets, because the large order will show up on the book for all to see.  Because traders will run the price away from the large order, large buyers and sellers have become very clever about transacting on the light pools but they still are usually forced to show themselves to a large degree.

Examples of LIT ECNs are:

  • BATS,
  • ARCA
  • EDGX
  • EDGA
  • NASDAQ Boston.

Each light pool has a different pricing scheme, and some will pay rebates for adding liquidity while others will pay rebates for removing liquidity.  A trader must understand pricing intricacies of each market in order to maximize his own cost efficiency, as well as to understand which markets will be the most liquid.

A trader with a longer term holding strategy who only places limit orders for profit will most likely always sit on the market that pays him the biggest rebate, and in some cases a trader can even make money from his transactions alone.  On the other hand if the trader seeks the most aggressive liquidity he will increase his trading costs, but will improve his ability to get executed at the price he wants.

Eventually when you have been trading for a consistent period of time choosing the right LIT ECN for your needs becomes second nature.

Dark Pools: The Rise of Private Exchanges

While lit pools dominate the trading landscape an increasing number of traders are turning to dark pools for their transactions.

Dark pools which are private exchanges with no transparency have been gaining popularity in recent years.

In fact they accounted for about 40% of all stock trades in 2017.

Institutional investors in particular are drawn to dark pools because they offer the ability to find buyers and sellers for large orders without revealing their intentions.

This allows them to obtain better pricing and minimize market impact.

Dark pools also offer lower transaction costs and the potential to fill trades closer to the mid-point of the bid-ask spread.

However critics argue that dark pools may result in stock prices on public exchanges not reflecting the actual market value.

Despite the controversy surrounding them dark pools continue to play a significant role in the trading world.

At InsiderFinance we provide real-time options flow sentiment analysis and trends analysis to help traders interpret both dark pool and lit pool trades bridging the information gap between retail traders and institutional investors.

Don’t forget to check out our Masterclass for trading with options flow and dark pool prints.

Daniel Major

B.S. Degree in Economics and Finance. Professional day trader. Live and work in Manhattan, NY, NY.

Page Updated: October 12, 2023

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