I. An Introduction

Better data means data whose viability and relevance is vouched for by research—data that has meaning. In the market, better data (for better or worse) also means modern data. Too many investors use outdated methods without realizing that new regulations and new market infrastructure have made them irrelevant.

Today, over ⅓ of equities trade away from exchanges in Alternative Trading Systems (ATSs) and in brokers' back rooms. These "dark pools" are black boxes by design—their quote information doesn't see daylight. In a market where the flow and translation of information into price is supposedly guaranteed by public quotes, this should be a point of common interest (and some consternation).

But no, we still frequently hear that a stock was "up (or down) on strong volume," or that "institutions are buying," as if the statements have practical meaning. We wonder, "What kind of volume?" "Where?" "What was the motivation?" "Was it hedged?" "How many shares still need to come to market?" We ask these questions because the answers mean the difference between a winning trade and a misstep.

And so, by necessity, this documentation isn't just a user manual, but also an introduction to a slightly different way of thinking about a market that's built around liquidity rebates, high-frequency market-making, and off-exchange trade routing. For an introduction to the source and interpretation of our dark pool data, read the white paper and contact us with any questions you might have.

II. The Dashboard

Your dashboard is the way you access and edit the list of all of the securities that you want to keep track of. These are the stocks in your portfolio and the stocks that you're considering adding to your portfolio. These are the rights, warrants, and preferreds that you're watching for arbitrage opportunities. These are the industry ETFs that you're using to hedge, and all of the other linked and indicative securities that you need to follow.

What you add to your watchlist is entirely up to you, but we recommend that you take full advantage of it. You will receive email alerts (see understanding alerts) only on the securities that you "Follow," so everything that matters to you and your portfolio should be added to your dashboard.

If you're unsure how to add and remove tickers, or you're too afraid to try, keep reading. Otherwise, skip ahead and try using the chart.

a. Adding to Your Watchlist

All you need to do to add a security to your dashboard watchlist is click on the search box in the top left corner and type in the ticker of the security that you want to follow. When you've found it, press "Follow" and it will be added. From this point forward, you will receive email notifications regarding this ticker.

Did you forget the ticker of the security you're looking for? Try searching by name. The search functionality is the same as search on the chart page.

Now that everything's on your dashboard, remember to use the "Quick Look" feature, which displays the last twenty days of price and DPI. This makes it easier to quickly assess the direction of all of the tickers in your portfolio without bothering to open up every chart individually.

b. Removing from Your Watchlist

If, for whatever reason, you think that you'd rather not follow a certain ticker any more, we've got you covered.

All you have to do to guarantee you'll never hear from that ticker again is press the corresponding little red "x" on the far right of your watchlist. After a brief confirmation, the offending ticker will be removed, and you'll never get an email notification about it again.

III. Using the Chart

This section will cover both the functionality and interpretation of the chart. Because correct and consistent interpretation of high-signal data is the essence of your decision-making process, we've tried to make our chart as free from bias as possible and only as customizable as necessary.

We use modern web tech­nology to facilitate the chart's inter­activity, so remember to allow cookies and Java­Script. For best per­formance, also be sure that your browser is up-to-date.

a. Functionality

Ideally, you won't need to spend much time in this section.

Why? Because the chart is designed not to be learned with a manual or a course, but with a mouse and a few minutes to spare. We've tried to keep it as simple as possible so that you can focus, rather, on the interpretation of market phenomena and, by extention, your portfolio.

With that brief admonishment, those of you who like to read the instructions before assembling Ikea bookshelves can read on.

In the top-left corner of the window is a search box. This is the same thing that you've seen on your dashboard. With it, you can search for the chart of any of our 8000+ securities simply by clicking and typing in either

  1. the ticker, or
  2. the full name of the security.

For example, you may recall an article about one of those "explosive" growth stocks, but all you can remember is that the ticker started with a "B." Well, you can type "B" into the search box and scroll through all of the possibilities until you find it.

Of course! BOOM. How could you have forgotten?

Alternately, you may recall that you read something about a lousy exchange-traded note linked to agriculture, but you can't remember the ticker. Why not try typing in "agriculture?"

Of course! DIRT. That was it.

Simple enough, right? Now let's move on to the basics of viewing the chart itself.

2. Focus and Context

The chart is, basically, composed of two charts:

  1. The focus chart is the big colorful one on top.
  2. The context chart is the little area chart on the bottom.

The purpose of the bottom context chart is primarily to serve as a viewfinder so that you can narrow in on smaller time-series as you see fit. E.g., maybe on this chart of AAPL, you'd like to see what the dark pool indicator was doing back in mid-2012 at that peak.

To do this, simply, click and drag your cursor across those dates on the little context chart. You'll zoom in and a translucent window will appear, indicating where you are on the focus chart.

Now that you can see more detail, you mouse over the data and notice that DPI was frequently dipping below 30%. Not a good sign when it appears to have stayed mostly above 40% before.

Do you want to zoom in more? Just drag in the sides of the translucent context window. Want to pan across the data instead? Click and drag the window itself.

And when you're all done and want to zoom back out, just click once anywhere on the little context chart. Simple as that.

3. Settings and Studies

In the top right corner of the window, you'll notice that there's a small bank of three toggle buttons and a dropdown menu.

The three toggle buttons are:

  1. Chart size. Two years or five years.
  2. Price type. Either candlesticks or a close/close line.
  3. Y axis. Either in percent change (%) or dollar-amount ($).

These should be self-explanatory. While we recommend using a 5y chart with candlesticks and percent change, not everyone feels similarly. Users with less system memory may prefer using a price line instead of candlesticks and a 2y chart instead of a 5y chart for performance reasons.

How about the dropdown menu?

These are the selections for what you'd like to study on the chart. They are:

  1. Price (candlesticks or green line).
  2. Total Volume (pale chartreuse bar)
  3. Dark Pool Volume (blue bars)
  4. Dark Pool Indicator (DPI, the blue gradient line)
  5. Short Interest (SI)
  6. Implied Volatility (IV, the purple line)
  7. Gamma Exposure (GEX, the orange gradient line)

Because a chart with all studies visible can be overwhelming, we recommend being selective. Play around with each of the settings until you find something suitable. We talk about this more in the interpretation section.

And finally, to squeeze the last bit of data out of the chart, move on to the next section.

4. Hover for More Data

When you move the cursor over any day on the chart, detailed information will appear in the top left of the window. When all studies are toggled on, it looks like this:

In order, each line represents:

  1. Date
  2. O: Open price
  3. H: High price
  4. L: Low price
  5. C: Closing price
  6. Blue: Dark Pool Indicator
  7. Orange: Gamma Exposure
  8. Purple: Implied Volatility
  9. Orange Circle: Short Interest
  10. Pale Chartreuse: Exchange Volume
  11. Light Blue: Dark Pool Selling Volume (non-short volume)
  12. Dark Blue: Dark Pool Buying Volume (short volume)
  13. Arrows: Total Daily Volume

Still have a question about functionality? Something not working quite right? Let us know.

Next, we'll talk about what to actually do with all of this data, and what it means.

b. Interpretation

Everyone who has spent any time in the market knows that interpreting market data is highly subjective. In fact, interpretations are commonly polar opposites. It's "more art than science."

This isn't an excuse to be lazy, however. Data should not only be correct, but should have a meaning and purpose for its presentation. Otherwise, it's just noise.

It is therefore critical to understand that the data that we have chosen to present on this platform is of equal importance to the data that we are deliberately not presenting. After years of research, we feel that this data is more valuable than other data. With that in mind, let's talk about the what as well as the why of what this particular data can tell us.

We'll start with the DPI.

1. Dark Pool Indicator (DPI)

When DPI is higher than usual, that means there was more buying than usual in dark pools.

This is a simple concept to understand and blindly put into practice, but it is better to understand why it works this way. For the whole story, read our white paper. For a practical overview, see below.

The dark pool indicator (DPI) measures, out of all trades that are effected off of stock exchanges, the likelihood of a trade being a purchase or a sale. You might be thinking, "but half will be buying, half selling!"

It is important to understand that this is not true.

Most dark pool trades fill at the midpoint between the bid and the ask prices. That means that if the spread is $50.00/$50.01, dark pools trade at $50.005. So while you would never be able to buy shares of this stock for less than $50.01 on an exchange (because that's the best ask), you would be able to buy shares in a dark pool for $50.005, which is less than the best offer.

The incentive, then, is for market-makers to seek out liquidity in dark pools to improve their profits from quoting bid-ask spreads. But the effect of this activity is that (often large) trades that would have otherwise moved the price by being routed to an exchange simply fill in a dark pool and fail to affect the price. And because the dark liquidity is being absorbed by the market-maker rather than the market itself, it is theoretically possible for every dark pool trade to be a purchase or a sale.

When this happens throughout the course of a day (or over several days), sustained imbalances form. Price may rise, but dark pool traders may be net sellers. Price may fall, but dark pool traders may be net buyers.

As you can see, this scenario can create a huge information gap between dark pool traders and everyone else. In the case of many stocks, price becomes chronically disconnected from reality as a result. The tendency, however, is for price to correct as time passes and as information becomes more symmetrical.

The extent of this imbalance is what the DPI measures every day. The opportunity (or the risk), especially in cases of extreme, sustained imbalance, should be apparent.

Was that a lot to take in at once? That's fine. We're trying to be as concise as possible here, so why don't you email us your questions? In the meantime, let's move on to something a bit more familiar (though still confusing).

2. Short Interest (SI)

If 5 out of 4 people don't understand fractions, 6 out of 4 don't understand short-selling.

Short interest is the measure of total (gross) shares held short. Here it is, straight from the horse's mouth:

The SEC approved amendments to FINRA Rule 4560 (Short-Interest Reporting). The amendments: (1) codify the requirement that member firms report only “gross” short interest existing in each proprietary and customer account (rather than net positions across accounts); (2) clarify that member firms’ short-interest reports must reflect only those short positions that have settled or reached settlement date by the close of the FINRA-designated reporting settlement date…

Practically, this means that of all of the shares held short out there, we have no idea how many of them are hedged, or are hedges themselves. And even if we received short interest data every day, it would only report short sales that occurred at least three days ago and that were held on to.

Add to this the problem that short interest is reported on an almost two-week delay and you start to wonder how much the data is worth after all. Ultimately, the data is going to be over two weeks stale, and it doesn't necessarily tell us if anyone is actually net short a stock.

That said, viewing short interest as part of a time-series chart offers some idea of why and how short positions are taken. It also provides an idea of how many days it would take for short-sellers to cover all of their positions in the event of a squeeze. So yes, it's still useful—just with a few caveats.

In the chart above, you'll see that we're hovering over a short interest reporting day (highlighted in blue), and that the short interest is 6,877,500 shares. The important thing for you to notice is that the height of the total volume bar is almost exactly the same height (at 6,837,678 shares) as the short interest graph. That's because we draw the short interest line on the same scale as volume. This gives you a straightforward, visual idea of how many shares, relative to daily volume, are being held short.

The general idea is that if short interest is a lot higher than daily volume, or if it's accelerating rapidly, it's probably significant. In what way is it significant? That's highly circumstantial. A good rule of thumb is to consider heavy shorting at a recent high price a bearish sign, but aside from that, the jury's out on statistical correlations. So absolutely, use short interest in your analysis, but never simply view it in a vacuum.

Context is important, and this next indicator is indispensable for providing context. Unfortunately, it's rarely mentioned outside of option-trading circles.

3. Implied Volatility (IV)

Implied volatility (IV), especially in combination with the DPI, starts to really round out our picture of well-informed investor sentiment in the market.

IV is actually pretty simple: It tells us how expensive options are. This is significant in two ways.

  1. It tells us how much people are paying for protection (put options), and
  2. it forecasts stock price volatility.

When a stock price is dropping rapidly, one of two things can be happening. Either investors are selling, or investors are hedging. If it's the former, there's trouble, and further downside is likely. If it's the latter, then it's much more likely to be short-lived.

Think of it this way: You buy insurance for things that you like and want to keep (e.g., cars, boats, rings, lives). Investors do the same, except the insurance that they buy is called a put option. Like in any market, when demand for these options increases, their price (implied volatility) also increases.

Observe, in the chart above, the days when implied volatility sharply rises ("expands"). They tend to be days where price turned sharply down. When they aren't, they are almost always the day before earnings announcements, when near-term uncertainty is at a maximum.

These sharp increases in option prices on lousy days are usually—you guessed it—investors buying insurance. They want to protect their investments, and option sellers are happy to absorb the risk in exchange for a cash premium.

Bear in mind, though, that it's called implied volatility for a reason. Sometimes (see above), IV expands and price doesn't recover (so your evaluation of IV will depend on your opinion of the stock or asset class). Which brings us to the second use for IV: actually forecasting volatility.

Implied volatility is expressed as a percentage n%. That percentage means that there's a 68% (one standard deviation) probability that the price will move between +/-n% within a year. From this figure, we can then derive expected daily volatility by dividing by the square root of the number of trading days in a year.

E.g., if IV is 177% (like in the chart above), the option market is implying that it's very likely for price to move +/-11.15% in a single day. Since the option market has an uncanny ability to make prophecies come true in the near term, the next two days saw 7.41% and 10.04% gains.

It's hard to say which is more incredible: the amount of information available in implied volatility or the fact that almost everyone ignores it. Don't ignore it.

Finally, if you're game, let's talk about something a bit more esoteric.

4. Gamma Exposure (GEX)

Gamma exposure (GEX); refers to the sensitivity of existing option contracts to changes in the underlying price. Like with DPI, substantial imbalances can occur between market-makers' call- and put-option exposures, and when those imbalances occur, the effect of their hedges can either accelerate price swings (like a squeeze) or stifle movement entirely.

We have developed a novel way to quantify this exposure and the direction of hedging that occurs in the event of n% price moves. The effect of this insight on our forecasting has been profound.

On the chart above, the highest GEX value is +6.4 million (toward the left of the chart). This implies that if price moves +/-1%, 6.4 million shares will come to market to push price in the opposite of the prevailing direction. The day's total volume was 23 million shares (making GEX nearly a third of total volume), which means that price had little chance to go higher. And it didn't.

At the low end of the chart (toward the right), GEX is -2.2 million, which also implies that if price moves just +/-1%, 2.2 million shares will come to the market, but this time it's to push price along with the prevailing direction. This heightens real volatility and, like implied volatility spiking, suggests that price is more likely to trend upward in the near term.

Because calculating GEX is a time- and data-intensive process, and because it is a more sophisticated tool designed for market professionals, it is currently an exclusive Premium feature. If you'd like to learn more about the data, correlations, or methodology, contact us so we can chat.

Also, if you'd like to read more about this research and its applications, be sure to follow SqueezeMetrics on Seeking Alpha.

IV. Understanding Alerts

Alerts are what we send you by email when there's a two-day statistical anomaly in any of the securities on your watchlist. By "statistical anomaly," we simply mean an unusually high or unusually low dpi. It's important to understand that no other factor (e.g., price, IV, GEX, earnings dates, news) is taken into account.

This is important because it means that you need to interpret this signal in light of any and all other factors in the market. Is the stock at an all-time high? Is it commodity-linked? Was there a recent acquisition? Is there an earnings report this week? Dark pool traders aren't making their decisions in an informational vacuum, and neither should you.

the research page aggregates every alert that we generate, market-wide, so that subscribers can get a wide-angle view of dark pool market sentiment and generate trade ideas.

a. When does the data update?

Alerts are sent to subscribers at the same time that our market data updates. Generally, this has been a bit before 6:00pm ET, but it's entirely dependent on a number of market data sources. If something hasn't updated but it seems like it should have, let us know.

V. The Research Page

The Research page is a feature that brings every daily alert together in one place. There are hundreds of alerts daily, and the Research page organizes them by date and DPI, and sorts them by liquidity.

This is a very powerful tool for idea-generation and sentiment analysis. Subscribers should not hesitate to get in touch about question or concerns.

VI. The Dark Index (DIX)

When high-frequency trading (HFT) took over for U.S. equities market-making and consolidated, liquidity providers started leaving trails for us to follow. The Dark Index (DIX) is the culmination of our research into dark pool short volume. For a deeper dive, be sure to read our white paper.

The DIX is simply the aggregated dark pool indicators of the S&P 500 Index. It is, therefore, a measure of market sentiment from the point of view of dark liquidity—a largely unexplored source of information. For the sake of utility, the DIX uses dollar-weighted trading volume to compute the ratio of dark pool buying to dark pool selling.

Users will also note that we display, in tandem with the DIX, the gamma exposure (gex) of the S&P 500. Conventionally, our GEX metric is measured in shares-per-1%-move, but for the sake of consistency, the index GEX is also measured in dollars (per 1% move of index components).

When GEX is a high number, it acts as a brake on market price. When GEX is low (including negative), it acts as an accelerator. Practically, the "brake" stifles the market's upside while the "accelerator" ultimately enables upward price action resembling a squeeze (in both form and function).

The DIX and index GEX are free for both our subscribers as well as the investing public. We are hopeful that it will help foster some lively discussion about the role of dark liquidity and derivatives in determining market prices. In fact, lively discussion is very much our forte. Get in touch.

The index will update by 6:00pm ET except when market data is delayed.