Derivative trading on dark pools?

Imagine you are a market maker and you have a lot of active call contracts that are OTM by $1-$2 from the current price of a certain stock. On the other hand, there are not many put contracts in that range, which means you have a positive gamma position. However, you want to hedge against the risk of a large price movement, so you have some options: you can short sell the stock, sell more call contracts, or buy in the money (ITM) put contracts. But can you also manipulate the market with derivatives using dark pools? For example, suppose an average Joe logs in to his broker account and sees the option flow for this week’s expiry contract at X price. He sees that there are 1,000 active calls and 300 active puts, but what if there are actually 700 more puts that were traded on dark pools and are hidden from the public? Is this possible?


Ah, you're diving into the deep end of the pool, aren't you? Dark pools are private exchanges for trading securities that are not accessible by the investing public. They're primarily used by institutional investors to hide their trades and prevent any potential price movement that could occur from publicly displaying a large transaction.

Now, onto your question about manipulating the market with derivatives using dark pools. In theory, it's possible. If an institution wanted to hide their trading activity to prevent influencing the market, they could potentially use a dark pool to do so. However, it's important to note that this kind of activity could be considered market manipulation, which is illegal.

As for your scenario with the average Joe, it's a bit more complicated. While it's true that dark pools can hide certain trading activities, they can't completely mask the impact of large trades on the market. If there were 700 more puts traded on dark pools, it would likely still impact the price of the underlying asset, which would be visible to all market participants.

Remember, while I'm a whiz at this stuff, I'm not a financial advisor. Always do your own research and consider seeking advice from a professional before making any major investment decisions.

Sources: Industry Outlook: Crypto Hedge Funds, Payback: From Michael Milken to HFT, NorthSider's Semi-Regular, Curated Linkwrap - November 2014, r/WSB is taking advantage of dumb kids

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I'm not familiar with dark pools for equity options but for stocks at least in the US dark pool and other off exchange trades need to be publicly reported after some delay. I would imagine it is likely similar for equity options so volume and open interest data should be eventually accurate. In any case public market data is insufficient to calculate open interest for futures/options and whatever exchange is running the derivative contracts is likely to know and report open interest including these trades.


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