>They’re offering what are dubbed private rooms, gated venues that take the core benefit of a dark pool — the ability to hide big equity deals so they won't impact prices — and add exclusivity, specifying exactly who can partake in any trade.
I'm not sure what all the consternation is about. Even without dark pools you could always do direct trades[1] with a party of your choosing, which is even more private and exclusive. The "private rooms" mentioned in this article just makes this slightly more automated than some trader messaging his buddies on the bloomberg terminal.
I strongly suspect that wall street has looked at 401k's/index funds as a giant money filled piñata. It is a huge pile of money following a well understood algorithm which makes it vulnerable to attack.
I suspect that this is the absolute core of "dark pool" strategy. Any trade that happens behind closed doors that "doesn't impact prices" means that an index fund is buying or selling at a price other than the "real" price meaning that dark pools are functionally a wealth transfer from grandma to an institutional trader.
It's actually the other way around. As a big fund looking to trade a large number of shares in the public market, you'll quickly realize that the market tends to move away from you, and statistically, you're more likely to get a bad deal than a good one. Even if you try to be smart about execution by splitting your orders into chunks, randomizing order sizes, and similar tactics, there is still a huge information asymmetry between you and more sophisticated players. In many cases, they can classify your orders based on different characteristics of your order flow (such as latency profile), distinguishing them from so-called toxic flow from other HFT firms.
The purpose of these private rooms is to separate your orders from those players so that you trade against other uninformed parties, making your chances of getting a good or bad deal closer to 50/50.
This is not exactly how it works. You're right that a big fund executing on a public market will incur (potentially excessive) impact, but the purpose of these private rooms is not to prevent trading against informed parties! Often, the counterparties that a big fund might find on these private rooms will in fact be the same market makers and liquidity providers present on public exchanges.
The difference is that in these private rooms, liquidity providers are often able to understand their customer more. For example, big passive index funds aren't buying and selling due to some adverse knowledge of future price movement. Instead, they are merely following the index. If market makers are able to distinguish between the passive indexers and the smart sophisticated hedge funds, they will then be able to provide to the passive indexers at a better price.
Attempts at doing this are effectively already existing, the IEX [1] exchange being an example, albeit on a less ambitious scale than your idea:
> It's a simple technology: 38 miles of coiled cable that incoming orders and messages must traverse before arriving at the exchange’s matching engine. This physical distance results in a 350-microsecond delay, giving the exchange time to take in market data from other venues—which is not delayed—and update prices before executing trades
IntelligentCross Midpoint (a darkpool) is a better example, since it actually does matching periodically every couple of milliseconds [1]. IEX just introduces additional latency for everyone.
I think it's an interesting thought experiment. What would happen if the stock market were quantized to a blind one trade per-minute granularity?
I suspect this would put everyone on more even footing, with less focus on beating causality and light lag, placing more focus on using the acquired information to make longer-term decisions. This would open things up to anyone with a computer and a disposable income, though it would disappoint anyone in the high-frequency trading field.
> What would happen if the stock market were quantized to a blind one trade per-minute granularity?
Like one share of stock trades each minute in each name? Or one trade randomly executes?
If the former, you stop trading the stock and start trading something pointing at it. If the latter, the rich get to trade.
> less focus on beating causality and light lag
You’d have to ban cancelling orders, otherwise you bid and offer and then cancel at the last minute. Either way, you’d be constantly calculating the “true” price while the market lags and settling economic transactions on that basis. (My guess is the street would settle on a convention for the interauction model price.)
If you’re upset about stock markets looking like casinos, the problem isn’t the fast trading. It’s the transparency. Just don’t report trades until the end of the day.
If you aesthetically don’t like HFT, that’s a tougher problem as the price of the stock points at something tied to reality, and reality runs real time.
It has the same utility as in the opening cross, the most algorithmically-trafficked moments of trading after the closing cross. The last order can incorporate more information than an earlier one. Given the book is assembled transparently, that means an order submitted close to the deadline can “see” other orders in a way they couldn’t “see” it.
You would change the rules, but I think the result would largely remain the same. As a market participant with the fastest access to data from other markets, news, and similar sources, as well as low order entry latency, you would still be able to profit from information asymmetry.
Imagine that a company announces the approval of its new vaccine a few milliseconds before the periodic trade occurs. As an HFT firm, you have the technology to enter, cancel, or modify your orders before the periodic auction takes place, while less sophisticated players remain oblivious to what just happened. The same applies to price movements on venues trading the same instrument, its derivatives, or even correlated assets in different parts of the world.
On the other hand, you risk increasing price volatility (especially in cases where there is an imbalance between buyers and sellers during the periodic auction) and making markets less liquid.
let's assume you are right. Also assume that the two people in the dark room are both somewhat rational investors. Then let's imagine that they are trading at a price that is significantly different than the open price. Why are they both OK with that price? If the price is higher, the buyer could be buying for less in public. If it's lower, the seller is the one that could sell in public for a profit. So one of the two sides is making an obviously bad decision.
The idea instead is that in a dark room, you can trade large amounts of shares without HFT interference. They'll probably be trading pretty much at the public price, just without sending all kinds of information about the fact that they traded into the world.
If I am not mistaken, the trade still has to be reported after the fact. What they are avoiding is leaking signals about what they want to trade before the trade occurs.
Let's assume you are right. If two parties trade a large amount of shares at the public price, how is HFT going to interfere if the trade took place in public?
1) Dark pools are not as secretive as folks in this thread think they are.
2) Those trades are happening at the public price. Its not too often that the dark pool trades will happen outside of the NBBO and usually those exclusions happen for very large block trades.
3) Most (all?) pools are reporting to FINRA by closing some may even report sooner after the trade.
So I am not sure what your question is as the data is fairly public already.
For the record, all large index funds pay a 3rd party to guarantee index rebalance is within X basis points of close. It is reasonably large business for equity portfolio trading desks at investment banks. The margins is pretty damn tight, and the asset manager certainly get better fills than trying to do it themselves on the open market.
>I suspect that this is the absolute core of "dark pool" strategy. Any trade that happens behind closed doors that "doesn't impact prices" means that an index fund is buying or selling at a price other than the "real" price meaning that dark pools are functionally a wealth transfer from grandma to an institutional trader.
Is there evidence for this, or this all baseless speculation?
It sounds like they didn't read the article. Grandma's money is in a large centralized retirement fund whose managers trade via dark pools, specifically so she won't be grafted by AI traders every time they need to adjust its holdings.
There are funds that trade on the rebalancing and entrances/exits of individual stocks from the indexes. While this may offer some yield, you can still get pulled under the bus by large scale movement in the markets... as seen recently.
While I'm not a fan of the "dark pools", if your "grandma" is a buy and hold anyway, the price of the asset should be ballpark correct most of the time since presumably the people doing the trades in the dark room are rational? I suspect that this setup is more useful if you need short term stability in the price to set up a complex deal.
> functionally a wealth transfer from grandma to an institutional trader
This makes no sense. Grandma can only lose money if she sells, most are not actively trading in the market.
Also large trades are in both directions. Some are trying to unload large holdings and some are trying to build large holdings. These pools are merely trying to find other large transactions to be the counterparty, the net effect is to reduce volatility in the open market, which is the whole point: price stability for their transaction.
I don't really understand what you're saying. The scenario being discussed is that I buy a financial product for a higher price then [hypothetical alternative]. We use the phrase "losing money" in many cases where your financial upside is potentially reduced compared to alternatives. It isn't a "this makes no sense" situation.
> I strongly suspect that wall street has looked at 401k's/index funds as a giant money filled piñata. It is a huge pile of money following a well understood algorithm which makes it vulnerable to attack.
Did prop traders start out-performing index funds? If not, surely said supposition seems somewhat suspect.
>> I strongly suspect that wall street has looked at 401k's/index funds as a giant money filled piñata. It is a huge pile of money following a well understood algorithm which makes it vulnerable to attack.
Agree: They are called block trades in equities. Also, another benefit of a dark pool is that you can pay to control who you trade with. On the primary exchange, it is dog-eat-dog. This is why long-only asset managers prefer block trades for supersize trades, and dark pools for smaller trades.
To me, the practice of paying for (non-toxic retail) flow is way more suspicious than dark pools. This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run it. Unless you have incredibly overreaching regulation and constant monitoring, it is literally a fox in the chicken coop.
> This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run it.
This is not true, and front-running trades is both easy to catch and illegal. This is a bad combo for any white-collar crime.
You are correct that they make money by selling non-toxic order flows, but non-toxic here just means that retail investors tend to be "dumb money."
Market-makers need to estimate how much an asset is worth to be able to quickly fulfill orders - they can't instantly find people to take the other side of their users' trades. For example, user A buys Gamestop at $10/share, the brokerage accepts the trade and internally writes an IOU for that share, but later on realizes that the true price of Gamestop is $10.05/share. This means that the brokerage will lose $0.05/share because the price they estimated for the asset was too low. If too many orders from a source are like this, the source is considered toxic because the market-maker will generally lose money on them.
Some types of traders have highly toxic order flows. For example, HFT firms exploit <1ms latency in market makers' price estimates to systematically make money off the differences. Large funds can also place massive orders in a way that moves the entire market to make these estimates wrong.
Retail traders, in contrast, don't reliably know when a stock is mispriced. If Jimmy Bob Joe blows his college fund buying TSLA for $250/share, the exchange can probably give him TSLA at that price and not lose money.
If a market-maker gets too many toxic orders, it has to offer their clients worse prices to compensate for mispricing risk. Worse prices drive customers away, so they will often choose to pay for nontoxic orders to keep that risk down. We, the retail investors, get to trade for free at better prices and the market-makers get to turn a profit.
> it is literally a fox in the chicken coop.
The foxes here are HFT firms, and the chicken coop is any market where you end up trading with them. These "dark pools" benefit the little guys because they exclude the more predatory traders.
Or, to frame what you said in slightly different terms:
Why do people say "the HFTs" are the enemy? I mean, it's kind of true (the mental image I have of HFT firms and hedge funds is of a swarm of locusts descending on anywhere they smell money), but it's missing a super critical piece: there's more than one HFT locust swarm, and they all hate each other. They'd much rather screw each other (more money there!) than screw you (not as much money!) and they're willing to pay you if you can help them do it.
That's what payment for order flow really is: small bribes to send them something useful (non-toxic order flow) which they can then use against each other. Retail traders aren't the ones losing out here (or, if they are missing out, they're paying less than they'd pay under the old commission structure, so who cares).
to be legal, the broker selling your order flow must give the price you're supposed to have gotten to be at or lower than the best price from the market. I dont get how front running could work under this legal rule.
OP just provided an explanation for Robin Hood's business model, it was never stated that Robin Hood operates in accordance with the law.
In fact it is well known, that Robin Hood operated illegally for a long time and got fined by the SEC for its violations: https://www.sec.gov/newsroom/press-releases/2025-5
None of those violations are related to trade order flow.
The majority are related to customer protections, lack of data retention etc. With perhaps the violations related to the blue sheet data (transaction data), which is used by various financial regulators to sniff out illicit transactions.
Robinhood's been accused of selling out their retail customer by allowing HFT firms to frontrun retail trade. And yet, no evidence of such actions have been found so far.
The fact that violations happened is clear proof that violations can happen. You asked how RH could do front running when it's illegal - the same way they could and did violate customer protections when it is illegal.
Whether or not Robinhood could do it isn't the right question. The better question is whether or not it would make sense for Robinhood or any other actor to front run microscopic retail trades.
Do you understand how front running helps the front runner and hurts the large volume trader? I think if you did, you would realize that Robinhood has no reason to do it.
Each time I hear this I am reminded of the signs that appear the inside of hotel room doors in some places, advertising insanely high prices for the room. I believe these stem from laws that require the hotel to offer the room at or lower than the price advertised on the sign, so the hotels jack that price up to something unrelated to the actual price you'd get from competitive shopping. I assume this can't happen with open market prices, right?
I know someone and their Wall Street career is based on carrying out trades between two parties that wish to stay anonymous for the trade.
They do all the communication through a Bloomberg terminal and as far as I now they do no research with the terminal it is just their communication tool.
How is any law to be enforced? Most actions governed by law don't take place via such a visible and formal mechanism, and yet laws are written about them anyway!
(Also, when I spoke of a "reason to think it might be illegal", I had in mind, like, some sort of citation to a law or regulation or decision (or summary of such) that would indicate that, rather than, like, an inference about what the law would have to be in order to make other laws more easily enforceable...)
It is not clear to me what nefarious things people believe are going on there that we should be worried about.
All the article says is that people are doing things we don't know about, but implies that somehow we should feel not-okay about this.
I don't know what's going on in my neighbor's house either, and it could certainly be bad stuff, but that's doesn't mean that it is bad or that I should start spying on them.
If you look up RegNMS the goal is to make public markets fair by having rules that have to be met in order to trade. Dark pools allow participants to 'hide' information that's not public. It is mostly about the order books. If dark pool sell order for 1B of TSLA stock goes on the order book, only other members of the pool get that information. The dark pools are required to still follow RegNMS rules for trade prices, but there is an inherent asymmetry in the market information in this case as the dark pool participants can see the public markets and their dark pool in order to make trading decisions.
In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
And what would the problem be with that example? It seems everyone has agreed on a fair price and is trading on it. There isn't any incentive for the private traders to trade at a different price or one of them is getting ripped off due to the arbitrage potential. And they don't believe that publicising the trade would move the price or - again - one of them would have an incentive to do so because it'd move in their favour.
I don't see how I'd be disadvantaged as any actor in that scene.
You are disadvantaged as an outsider because you don't know who is buying or selling and how much they are trading. You don't know the demand levels at various price points. If, for example, you want to buy Stock A which is currently trading for $5 and sell it for $6, but there is someone trying to sell 5 million shares for $5.05 but you can't see that you can't make an informed decision on ideal price points for your trade.
Although the above example was missing some details, I suspected it was meant to illustrate the following effect:
The public last price was $5, so bid/ask will be around that price let's say 4.99/5.01, if you buy with a market order you'd pay approximately $5 ($5.01).
But if there is a new large sell order for 5 million shares at 5.05, then the market would react to this information and adjust bids & asks.
For illustrative purposes it could be possible (if the 5 million order is rather large in comparison), that the new bid/ask would be 4.89/4.91 and you'd get your shares for around $4.9.
That is irrational. It suggests every time someone sees a market price at $5 they could put in an enormous fake sell order for shares at $5.05 to buy shares at $4.90 then cancel the fake order, which makes no sense. "The market" is giving away freebies in an insane way.
If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.
>If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.
Except that the market is all game theory. If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.
I design some financial software and the best way to think about it is to abstract away the idea of money and numbers. Think of it as a maze and every stock and price point combination is a doorway.
Normally a door, when you open it, you can see down the hallway to how long the next door is without actually entering the hallway. (In the stock market this is called Level II data) the impact of dark pools is that when you open a door you can't see how long it is. Except that it looks like every other hallway with a defined length, but you don't know that it is a hallway that keeps going for an undetermined amount of time. There's no way to figure out the length without entering the hallway and going as far as you can until you either reach the end or become exhausted (Not a great way to solve a maze).
Without access to the dark pool the best you can do is enter the hallway and figure out it doesn't behave as expected and move away from it.
It's a significant advantage when you are playing against other people to see the complete picture of the maze at any given time. There are entire teams of PhDs working to decode the positions of dark pools they don't have access to by analyzing option data.
> If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.
Your basic argument there seems is "new information can cause the price to move at random". And I accept that. But it doesn't matter to anyone on the lit market because the trades on the dark market would help or hinder them at random if they were publicised. If there isn't a systemic bias then it is just noise, I have a choice between the price on the lit market or ... the price on the lit market plus some random variable that might be positive or negative. It doesn't change how much money I expect to make. I'm not at any sort of disadvantage.
It doesn't change my ability to value my trades and it doesn't cause me to think I'm going to be better or worse off. We already know that distinct market participants have different knowledge and world models. There isn't anything here that it is useful to adjust.
> Think of it as a maze and every stock and price point combination is a doorway.
This explanation literally makes no sense to me; I don't see how it matters. Someone offers to buy at $X/sell at $Y. Someone else chooses to take the other side of the trade or not. It is only that weirdly complex if you want it to be.
If you need omniscient knowledge of the market structure to value a good then it isn't possible to trade it because your knowledge is always lacking information that is relevant to valuations. For example, you can't know about orders that are about to be lodged in the immediate future. We all have to operate with the understanding that some other market participants know things we don't and value things differently. It doesn't make the trading environment unfair.
You seem to have a traders perspective here where you want to turn a turn an asymmetry of nearly irrelevant information into profit. I'm cool with that, but I don't care if it works or not. It sounds like a zero-sum game, someone is going to lose. and I don't see why I should be phased about who or why. I just want the market to offer to buy/sell things at a fair price. Dark pools don't seem to influence that in any way, the incentives mean that the price signalling should be basically honest.
Why would volume outside of the NBBO force price down? I think you are also over weighting order book impact to price. There is definitely some information there but with its not always that meaningful.
Because you want to move ahead of the 5.05 seller and be sure your shares can sell for $4.90. If the $5.05 seller is trying to sell 5 million, but it's taking a long time. They might drop down to $4.85 or something. It's all game theory and predicting what others will do. A big part of that is having all of the information.
You are not disadvantaged because you are not buying 5mm shares. I like to think of it closer to volume pricing rather secret pricing. You could definitely do retail level volume on a pool but you will be paying for it and that cost will generally be higher than any "savings" you may get in price.
Its similar to complaining that someone is buying eggs at wholesales prices while you are paying retail.
Its more like 50% of total volume being traded in dark pools. Your price argument does not make much sense though, the beauty of western markets is that folks are so opportunistic that someone will exploit any information asymmetry so your argument would not hold up. Also at the end of the day its not like buyers and sellers in a dark pool know "the price" of what they are trading, sure they have ideas of where they might be buyers and sellers but they are still using the lit market data to inform their decision.
but people trading inside the house would know this already. If they suspect that the fair price is being manipulated, why would they continue to buy inside the house?
> If you look up RegNMS the goal is to make public markets fair by having rules that have to be met in order to trade
That was the goal and it failed at it in everything but the most technical sense. Why two people coming to a handshake deal about the price of their property is illegal is insane. I previously bought the argument about propensity for fraud. But if we’re normalising crypto, there is zero need to continue treating stock like it’s radioactive.
> In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
Isn't that how everything is traded? Am I supposed to be outraged that everything I buy retail also exists in a wholesale market?
For these institutional traders, the pools offer them opportunities to trade with a small set of counter parties that also have deep deep liquidity, so in a sense it is kind of like the wholesale markets for retail. Orders hit the book in the pool and they don't have to worry about 'current retail' stock and can trade massive blocks with trade certainty.
>Dark pools allow participants to 'hide' information that's not public. It is mostly about the order books. If dark pool sell order for 1B of TSLA stock goes on the order book, only other members of the pool get that information. The dark pools are required to still follow RegNMS rules for trade prices, but there is an inherent asymmetry in the market information in this case as the dark pool participants can see the public markets and their dark pool in order to make trading decisions.
But traders can easily hide the size of their "true" order by breaking it up into chunks and constantly refilling the order if it's taken? This is basically trading 101. If you want to do a big selloff, you're not going to dump all of that in one order.
But by breaking up the order they have to wait and the market can move in reaction to their sell off unless they do it very slowly. Dark pools can completely hide a large sell or buy order from the market long enough to execute at the current strike if there's another member in the pool buying. They wouldn't use it if it didn't give them an advantage because it costs more than regular trades.
>But by breaking up the order they have to wait and the market can move in reaction to their sell off unless they do it very slowly
it kinda works out because the other side is also smart and will also break up their orders. Putting in a massive buy order is a good way to pay through the nose.
>In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
I mean, that's literally what happens with trading cards. It's super common to base face-to-face deals (whether for cash or trades) on internet pricing, including very big ones. (the trading card market is a lot less liquid, though, so it's also common for there to be a fairly big discount or premium on those prices in the deal for various reasons)
It's manipulation by definition. These hidden trades exist to prevent other people from being able to act in their own best interest based on available information. This isn't about what's going on in your neighbor's house. Your neighbor's house is private, markets are public. This is about being at a public auction in the middle of bidding on something when someone else walks up to the crier, whispers a few words in his ear, and then the crier just quietly says "bidding is closed" and you have no idea who bought the item or for what price but now you have to try to price similar items.
In the case of Dark Pools, it would actually be the crier saying "a lot 10x the size of what I'm auctioning just traded somewhere else where none of you lot can trade for xx price". So after they say that you actually do know the price that they bought the item(s). This is since the dark pools have requirements to report to the trade tapes their trades in fairly similar latency to the exchanges themselves.
EDIT: The rules also dictate the allowed prices the dark pools trade at. They have to be within the national BBO, they can't just trade at whatever price they want. So the public auction is actually helping them find the prices, without their pre-trade information affecting the price before execution.
Not manipulation as most/all of these execute around the NBBO. Exceptions exist for extreme block trades that may give some price advantage do to the sheer scale but we are not talking about manipulation.
I can easily see the retail price of a good, I can go to a wholesaler or some other holder of this good and ask them if I can buy it at a cheaper price. They might tell me to kick rocks if I don't have volume. Pretty similar to a dark pool. Markets are both private and public everywhere.
Your analogy is bad because this doesn't happen at a public place. People can't privately sell goods between each other. If someone someone sells their gold to a gold buying shop, that was not a public auction, yet people are still able to price gold.
>It's manipulation by definition. These hidden trades exist to prevent other people from being able to act in their own best interest based on available information.
So if I have a RTX 4090 to sell (a very sought after commodity these days), and I sell it to my buddy rather than listing it on ebay, I'm doing market "manipulation"?
Most things are different from each other. Why does that difference matter in this case? It looks a lot like traders trading in a market. That isn't manipulation.
That isn't so; I looked up an RTX 4090 on Ebay [0]. The only information I see related to depreciation is "Used: An item that has been used previously" and a representation from the seller that they weren't using it for crypto, suggesting that the seller (and the buyer; this looks like a standard graphics card listing to me) are treating used graphics cards as fungible.
If it causes "no liquidity" in the open market because nvidia (tsmc) can only produce so many GPUs / month and that causes nvidia's other cards to have a street price of 2x MSRP due to lack of availability? I would say yes.. It's just that "H100" or "RTX 5090" is not a registered stock with the SEC, so there aren't specific laws / penalties for manipulating the GPU market.
Same as "10 per store" limits when PS5s or whatever are in short supply, but then the CEO calls up the warehouse to get one for every student in their kid's class.
It's insider trading, just with a different class of insiders (i.e. first level of insiders are people associated with the company itself, and the second level of insiders are Wall Street traders with access to non-public pricing signals).
Insider trading is illegal because it undermines faith in the fairness of the public market. If insider trading is legal, then market actions by insiders are almost guaranteed to result in the action being a poor deal for the other side. Either the insider is buying shares because they have strong confidence that the price is about to skyrocket (i.e. prior to the announcement of a massive sales deal), in which case the prior holder lost out when they would have preferred to hold; or the insider is selling shares because they have strong confidence that the price is about to crater (i.e. announcing very poor results), in which case the person purchasing the share probably would have preferred not to buy at that price. The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result. When companies are privately held, buying and selling shares without insider knowledge (i.e. deals being conditional on due diligence) is much less common, so it's really only a concern for public markets.
Public markets absolutely depend on regulators enforcing that information asymmetry is kept to the absolute minimum possible, so that the market will be perceived as fair, so that people will continue to participate.
One of Matt Levine's common refrains is "Insider trading is not about fairness, it is about theft." There are always market participants with different levels of information. The problem occurs when you misappropriate confidential information you were entrusted with for personal gain.
I respectfully disagree with Matt Levine's framing. Yes, confidential information belongs, in a statutory sense, to the company, and using it for personal gain instead of company gain is a kind of theft, similar to an executive who uses their company car for personal trips, or any employee who might browse Facebook on a work laptop or take a personal call in a company office. But this argument is akin to saying that no senior executives should ever incur personal criminal or civil liability for the actions that they take in the name of the company, because it is the "company" that did it and not the individual. Most people (particularly after public implosions like 2008) find this argument reprehensible. In fact of the matter there are individual executives who do act in their personal interest. Should stock buybacks be illegal because it happens to be very much in the personal interest of the executive whose bonus depends on a rising stock price, while shareholders may have benefitted more from the executive focusing on day-to-day operations, thus the executive "robbed" shareholders because of making a decision to focus on the wrong thing? It's not reasonable to expect executives to "wear different hats" where one day they act out of their personal interest and the next they are some kind of selfless worker who works for The Company and whose only interests are the Board's and shareholders'. Executives are holistic individuals, they make decisions as holistic individuals, they were hired with the expectation that they would make decisions as holistic individuals, and in and of itself there is nothing wrong with that.
Rather, the theft is from the market participant who is getting the raw end of the deal. Legal trades require consent. If you sell someone a hard disk that you know crashed and is unusable, under the guise that it is working, you committed fraud. If you sell someone a new car that it turns out is going to break down almost immediately, you are subject to lemon laws and must refund or replace the car. If you had sex with someone in a case where consent was not in place, including in cases where the sex was pleasurable but the other person was defrauded to who you were (i.e. not their long-time partner), that is rape. And if you take stock that you're pretty confident is going to lose 80% of its value in three days when poor earnings will be announced, and offload it to an unsuspecting victim, no I don't think you can make the case that there is genuine consent here.
> The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result.
Finance noob question here: has this actually happened?
And related, don't non-pro traders basically always lose money on trades but still exist?
(I've been genuinely unsure why insider trading by non-decisionmakers is banned, always seemed like it would result in more accurate prices)
Please don't define things when you have no idea what you are talking about. Everything in this post is simply wrong. Markets are not about information fairness, individuals are free to do research and come up with their own prices.
Individuals are free, in their research, to access sources of information that are available to all other market participants, even if that information is usually out of reach for most people. The canonical example is using satellite photos of parking lots to predict earnings calls, i.e. https://newsroom.haas.berkeley.edu/magazine/summer-2019/stoc... . It's still legal because hypothetically anybody could do it. What's not legal is "doing research" by talking to insiders to get information that is not public.
Was this supposed to defend your position that dark pools are illegal? Full stop it does not and will never meet the definition of insider trading. Your free to believe whatever you want but it does not meet the definition and your posts offer little more than strange steps into loaded words like consent.
> I don't know what's going on in my neighbor's house either, and it could certainly be bad stuff, but that's doesn't mean that it is bad or that I should start spying on them.
Massive public investments and global finance could result in you and your neighbor losing your jobs and houses, and cost you a lot of tax dollars rescuing them. It's happened multiple times. That's why they need to be regulated.
Public, lit markets are a public good that lifts all boats. If people are feeling the need to move away from them that doesn't mean those individuals are up to no good, but it's a bad sign for the health of the system.
> Public, lit markets are a public good that lifts all boats
To a point. The benefits of millisecond-grain transparency really stretches my credulity.
Let people trade. Make them report it in a reasonable period. The folks who need millisecond granularity will find it. Most economic activity doesn’t need that, and while the liquidity is good, again, I’m not convinced it needs to be publicly disseminated in the way it is now.
Markets are supposed to be decision makers, and having pricing information be public helps firms and other allocators take better decisions. The question at hand is if the flow of information today is so fast that it deters smart decision makers because of other participants who can extract their decisions from them before they can act on them. Wether you believe markets should be more or less opaque should be decided by where you sit on this spectrum imo.
i thought these "dark pools" are visible _after_ their trades have completed.
The information about someone _wanting_ to buy or sell a large amount, is hidden via the dark pool, so that this order doesn't make the public markets move.
Great points - to put it another way, considering the data is available and investors now have the horsepower to crunch the numbers…why doesn’t Wal-Mart publish their entire inventory for every store in their system in an easy to digest CSV or whatever? Investors deserve to know!!!
Or, you know, sometimes people do business behind closed doors because day to day operations aren’t useful in many scenarios.
Isn't the problem that this allows for all kinds of forms of insider trading?
> Insider trading—the practice of buying or selling a company's securities based on material, nonpublic information—has long been a contentious issue in financial markets.
> Isn't the problem that this allows for all kinds of forms of insider trading?
No, it doesn't. All trades are made public after they happen, as per regulations. There is no difference to insider trading regulations if a bad actor trades via a lit exchange or via a dark pool. Dark pools only "hide" pre-trade information, such as standing buy or sell limit orders.
It stands to reason that if the buyer/seller are seeking private rooms there is something unfavorable for them about "lit" trading. That alone should raise red flags.
That raises red flags that the standard market regulations are bad - they are signalling that they believe an exchange with different rules is better for both traders. That would be bad for all the traders stuck on the exchange with inferior rules, but the solution is to reform the standard exchange.
Probably trying to get away from HFT if I were going to guess blindly.
It's by definition insider trading. If they made the trades in public the market price would change to reflect the demand. They don't want that to happen, they want the trade to happen at a non-market price set by people with information about the deal.
No, "I am XYZ hedge fund and I want to buy stock ABC" is not material non-public information to XYZ hedge fund. If it was, any buying or selling of stocks would always be illegal, since you would be "insider trading" on your desire to buy the stock.
Carlos Cabana, head of equity sales and trading at CastleOak, dubs the room a “diversity pool,” because the participants are all minority-operated brokerage firms. While in this instance CastleOak doesn’t know specifically who is on the other side of every trade, it knows it will be one of about 10 counterparties who meet certain eligibility criteria related to ownership and investment goals.
I am convinced that they only added this bit to make sure people would argue about skin color and ignore the implications of the rich making sure the peasants aren't allowed to play the same game as them.
It's far more likely that it's a tongue in cheek inside joke than it is they care what outsiders think. Or it's an internal reference that's a dig at someone or something and was never meant to be made public (these firms are small enough this kind of stuff can happen). Non-consumer facing finance is just about the least diversity conscious industry ever. They only care about green.
Ban high frequency trading, ban instant transactions (put them on hold for some time before buying/selling (hours minmum, longer for larger quantities), make the held transactions public, and tax the profits on a time-owned scale.
This would turn "investments" into investments again... you really believe that company XY will do something good? Buy stocks and keep them for few years until they grow. Politican John Bobson dumps his stock of ZX company? Well, now we know before they actually get dumped, and can sell our stocks too.
Buying stocks of a company for 1.7 seconds and selling them back is not an 'investment' by any kind of proper definition.
I'm not sure what value you are getting out of the second paragraph. If some politician dumps a ton of stock X and I go "oh no, I'd better get out of that as well", won't I still be in line behind not only the politician but also everybody who has bots that automatically act on his actions within nanoseconds? It gives you warning that a stock is about to crater, but there's nothing you can do about it without giving someone the power to jump the line, and power like that can only be abused.
> Ban high frequency trading, ban instant transactions (put them on hold for some time before buying/selling (hours minmum, longer for larger quantities), make the held transactions public, and tax the profits on a time-owned scale.
This sounds like a pitch written by a Wall Street lobbyist trying to go back to the minimum-tick days. (Holding large orders is just pure profit for arb firms.)
HFTs/market makers are competing for pennies on the dollar. They do not hold risk (long term), they exist to readily provide liquidity to your buy/sell orders. HFTs can be quite profitable, but that doesn't make them inherently evil.
Can you elaborate why those bans will improve the market and what the issues are with HFTs in your eyes?
These dark pools and private rooms appear to be a response to HFT. To get away from HFT. So HFT appears to be fragmenting the market which is probably not a net good. If that is not the purpose of dark pools and private rooms, then what other purposes do they have?
One of the unique aspects of dark pools (and this can vary by venue) is that orders are segmented according to the source type (e.g. retail, client of the operator of the venue, institutional trader, etc) and the quality/grading of their order flow. As an institutional trader trying to leg into/out of a large position, you'll want many different execution options to help minimize price impact + information leakage + execution time. Dark pools are a great option in which you may have the option to specifically trade against non-toxic order flow (e.g. retail) to achieve better execution.
There are other reasons as well, but these venues essentially exist to solve some very niche problems for institutional trading. Public filings are available for review in case you're interested in the rules of each dark pool. [0]
You are presupposing that there is always a counterparty to trade with. What about sell-side market makers? Those clearly aren't "investments". I your solution, all buyers will pay more and all sellers will receive less.
It does make it much more expensive, and something that people with other options won't want to be involved in. If 'dark room' trading was illegal, Goldman, etc. would exit those markets.
It's true that people break laws, but the extreme idea that laws and law enforcement are therefore useless is obviously wrong. Look, for example, at the Republicans and their allies banning DEI - it's had quite an effect.
The only reaction more adverse than the one you get asking coders about remote voting is the one you get asking finance people about transparency and anticorruption. It's an open secret at this point that any effort that would weed out a significant proportion of the fraud would cripple our finance sector overall just because everyone who runs it would be in prison.
If you want to know information before the public knows it (like the interest rate adjustment) go to a Wall St. bar and ask a trader. None of them are supposed to know that. They all do (unless they don't go out or talk to friends), and they trade based off of that information.
it's more like because governments have started to try to assign criminal liability to seniormost execs, not just to the people responsible. this is a response to the wink-and-nod cases that do exist but glaringly fails to account for the complexity and scope of large financial institutions and the fact that the guy at the top can't always supervise everything personally.
i don't know who you're talking to but no, it's not that criminal. it may be "corrupt" in the sense of rent-seeking or recapture-heavy institutions. it may be "corrupt" in the sense that your average IB analyst knows he's pulling long hours to churn out reams of 80% BS. it may be "corrupt" in that the VP at a PE fund knows that 7 turns of leverage and an inflated multiple for this middle-market shitco isn't actually a good buy. but there are a lot of honest people, enough that you can choose to do business with the same.
> it's more like because governments have started to try to assign criminal liability to seniormost execs, not just to the people responsible.
seniormost execs exist to be the people who are responsible. They get the big bucks because they're supposed to be accountable for everything that goes on under their watch.
If they don't want the liability, or can't actually supervise sufficiently to prevent crime, then they shouldn't accept the job. If they want to take the paychecks and golden parachutes, they can also take the prison sentences.
BS. they exist to accept some level of responsibility but it's impossible to make them anything except scapegoats in orgs of a certain scale. if you disagree, you are either misinformed or simply hate them and want an excuse to jail them.
do you know how many managing directors JPMC has? this is just one bank and we're talking about a very senior position, half-a-million-a-year base salary sort of seinor. they have around 1,600. it is impossible for one person to manually oversee even what's a pretty high-level position with many direct and indirect reports. impossible to manage this without trusting subordinates.
it sounds like you are motivated more by schadenfreude or malice towards these people because of "paychecks and golden parachutes". this isn't a good-faith position or a reasonable policy.
top executives are responsible when the company makes a profit. maybe they should be responsible when the company commits a crime. if they can't be responsible when the company commits a crime, how do they justify being primarily responsible when the company does well?
they are responsible when a company makes a profit or a loss. that's a pretty fair trade-off. the core difference is you can't attribute a profit or loss solely to one person, not hardly ever. you can, however, attribute criminal activity to a certain number of people, because it's very tightly defined. you can't just calculate the EV of every action the same way.
Back in the day when I was day trading in a firm, dark pool was pretty much the only place that I could offload some stocks quicly when they went the other way. It was pricey though so we were told to use it as a last resort.
I used to be friends with some finance guys around 2008 and they told me the same thing. Retail investors are basically suckers to them who can be exploited.
Goldman and others got in trouble for selling access to the supposedly secret orders in their dark pools back in the day.
They were fined 800k I think?
I believe dark pools started growing post flashboys when people realising what hft meant and wanted an escape (see comment below). But as they got big they became a target in and of themselves (ecology in action I guess).
I worked in algo trading at the time (not hft, but anti hft)
Dark pools started in the 1980s once the SEC permitted securities to be traded off the exchange they are listed on. I think that was well before flashboys.
Dark Pools were the original "equitable market"; when market makers were trading in 1/8ths and fixing markets, dark pools enabled people to trade in 0.01 increments.
> a New York-based minority-run brokerage [...] wants to trade with similarly minded businesses, so it uses a private room provided by the ATS operator OneChronos. “It’s about exercising control, what liquidity a broker wants to interact with” Carlos Cabana, head of equity sales and trading at CastleOak, dubs the room a “diversity pool,” because the participants are all minority-operated brokerage firms. While in this instance CastleOak doesn’t know specifically who is on the other side of every trade, it knows it will be one of about 10 counterparties who meet certain eligibility criteria related to ownership and investment goals.
The fact that, under this mechanism, one can quite literally choose the skin-color of the counterparty trader, under the banner of "diversity" and "similarly minded"-ness, is quite fascinating regardless of politics or morality.
After coming of age on Milton's and Hayek's views of the market--as a mechanism for processing information and allocating resources which was far better than any central planning could be--it was a huge eye opener when I actually did go to Wall Street.
The degree to which market players are going to make market signals to not have the correct meaning is amazing. Dark pools, chopping up buys and sells and strategically rerouting them--all meant to make the market as bad of an information source as possible.
In retrospect, it seems obvious that they would do this. If the market is the best source of information, you can't beat the market, because you'll never knew more than it will.
This actually sounds really cool as a vetting of counterparties and risk reduction for liquidity. I worked munis 2008-2010 in support but learned a ton about all sorts of Wall Street products - traditional and synthetic. So these are for trades, formal, with a bit more teeth to them than CDS type transactions, which even post crash were crazy amounts of money on paper but structured by usually pretty knowledgeable firms (in our pool). Every tool can be misused, and the minority owned room / platform actually seems neat to me. The casino is big and brutal and smaller firms have roles too.
Will these lead to another London Whale? Time will tell.
Many comments are saying that these rooms have been created to give fund managers the ability to execute large trades while keeping the price similar or close to what is available on the open market. I guess my question is why should they should be allowed to be protected from this type of risk? If they were not protected from this large type of risk, then maybe we would have more competition in the large fund manager space because, like hedge funds have experienced, after managing a certain amount of money there is a diminishing return as others will see and follow your trend.
tons of trades have been filled for a long time by IBing your buddy down the street. i don't see how this is particularly different/worse besides maybe improving efficiency.
I don't quite understand this - are these "rooms" where ownership of shares is tracked separately to how an exchange tracks them? E.g. I own 80% of a company, and I keep the official ownership, but let people buy them from me and from each other, but I keep the record of who owns them?
It's simply a mechanism to allow trades to happen outside of the lit market, not much to do with ownership tracking. The DTCC still "owns" the shares and the brokers are keeping track of individual ownership. There may be a clearing house to facilitate trades between brokers. Dark pools are available to retail traders via some brokers but of course most are not that easy to get into. Its really no different than trading on the open market but there is less available information.
What is interesting here is that if more & more volume goes to private exchange activity, then as the volume dries up on public exchanges, there will be more volatility.. and more reason to move to private exchanges.
There must be some point where this becomes self defeating though, no?
Dark pools work in generally liquid and broadly balanced (between buy orders and sell orders). In times of volatility or when the order book(s) become heavily skewed to buy or sell orders - everyone will scramble to primary liquidity at the exchange.
I've been wading through terabytes of financial data over the past month. (I'm an ML/AI software engineer trying to create a trading bot that makes me more consistent income during times of uncertainty that are outside my control.)
This is some of the data I'm looking at. NVDA price on a particular day vs. average position of trades in bid ask spread aggregated over 10 seconds, on all the exchanges it is being traded on. When it is close to 1, it is trading at close to the NBBO ask; when it is close to 0, it is trading at close to the NBBO bid.
One of the things I found is that the dark pool trades predict price action very well on a few-minute time horizon. "FINRA Alternative Display Facility" on the 2nd plot from the top is all the darkpool trades. If I had access to dark pool trade data in real time I think I could piggyback off the manipulators and make bank.
Unfortunately the SEC only requires them to report transactions within 15 minutes, not in real time.
> Unfortunately the SEC only requires them to report transactions within 15 minutes, not in real time.
TRF reports must happen within 10 seconds or be submitted with a late modifier [0]. An executing broker systematically submitting all reports 15 minutes late would be investigated pretty quickly.
You can buy access to the consolidated tape from a marketdata provider, although this is going to be pretty prohibitively expensive for an individual.
I have a Polygon real-time market data subscription and everything comes real time except for darkpools.
From the customer service bot:
"Yes, other trades are generally reported faster than dark pool trades on our WebSocket. We stream market data in real-time as we receive it, with most trades being reported very quickly. For US stocks, the average latency for trades and quotes is less than 20ms.
However, dark pool trades can be reported with a delay. FINRA allows up to 15 minutes for reporting trades from dark pools. This means that while most trades come through almost instantly, dark pool trades might have a longer reporting time."
I'm not sure what market data provider provides dark pool trades in real time?
Are you using Polygon real-time data for individuals? I suspect if you're after more fine graded data you'd be looking for a data provider for "professionals". There are usually different offerings, one for personal use and one for business use ("professional subscriber"), but these market feeds are quite expensive.
I suspect that customer service bot is incorrect. As also noted on this page[0], all dark pool trades are published to the consolidated tape, which appears to be part of the polygon API.
As an aside, the behavior you’re seeing might actually be causal- a large print appearing on the tape likely causes automated systems to widen out their quotes. Or alternatively, if the trade is through the NBBO, you’re seeing the top of the book (the protected quote) being swept in compliance with RegNMS.
That's one of the purposes of darkpools, to let institutions trade large size without moving the market. No one's getting manipulated here: both the buyers and sellers know what's going on.
You can trade on these yourself - the darkpool operators are always looking for new market makers. All you need to do is agree to quote a few hundred US equities in decent size inside the NBBO, six and a half hours a day, and you too can have access to this flow.
If that's the case, couldn't the providers who operate the dark rooms (like OpenChronos) use their own realtime data to do so? Are there any who do that today? (i.e. monetized market surveillance). If so, does it run afoul of regulations?
I don't know, honestly. I would imagine it to be illegal to trade on that data before it's released to publicly-available trade streams.
I'm of the opinion that a huge amount of manipulation happens and the SEC either turns a blind eye to it or the SEC goes after easier fish that have worse lawyers to get their income.
> I would imagine it to be illegal to trade on that data before it's released to publicly-available trade streams.
But what would be the penalty if you are caught? A few hundred million dollar fine? Absolute peanuts to any of the firms operating these pools. Of course there is corruption in the system, it is set up to facilitate corruption. Without corruption there would be little reason for these to even exist.
I tried to train a model to predict the darkpool transactions from the rest of the transactions. It didn't work. I'm back to the drawing board trying other things now.
why do you think you will be able to generate "consistent income" with a trading bot in a field that is highly scrutinized by some of the best talents in the world with access to better & faster data and backed by a mountain of capital?
A lot of people say this, but you miss 100% of the shots you don't take. If you think you can't do it because there are "better people already doing it", or because academics say the markets are efficient and therefore you shouldn't try -- you will never succeed at anything.
- I really don't think they have the best talents in the world. The last place I'd want to work is a finance company. That's true of most AI/ML engineers I know. Therefore I think the best AI/ML talent is outside, not inside.
- HFT and speed isn't the game I'm playing. HFT firms that trade with FPGAs colocated with the exchange are also cursed by their own working business model and they aren't usually interested in minute-scale AI/ML trades
- Not counting speed, I can get most of their data, you can just pay for it. You just need to work out whether you can make more $ than the cost of the data. I suspect it's possible.
- Being backed by a mountain of capital means you take less risks, and you hedge volatility to please your clients, often at higher prices than efficient. Nobody would $100 million would risk 20% of it to make 100% gains. I'm happy to risk 20% of my net worth to double my money though. Big difference
- The market is filled with price action traders that amplify volatility in surprisingly predictable ways. Markets drift quite predictably to Trump policies over hours, not milliseconds. It doesn't take an idiot to realize that markets are headed down if he announces more tariffs.
- I suspect there are lots of $1000-per-trade opportunities in corners of the market that the big players do not take because they go after bigger fish, and increasing the volume on those trades would result in moving the prices and the strategy not working. For me though, $1000 a day is meaningful. That's enough to replace a dayjob.
Wild that Bloomberg includes a trader who focuses on "diversity funds" as an example. Imagine now that traders focus on only non-diversity funds, and how that looks.
It sounds like they want to hide congressional investments and stock trades from their constituents, or at least this could be used in a way to achieve that.
Do all trades get reported to some agency of the government (including those done in private rooms)?
Do companies themselves know who owns their shares (including those done in private rooms)?
If the answer is no to either or both of the above, doesn't that create all sorts of ownership problems? As an analogy, I'm imagining a country where there is no reliable municipal property registry, and no one knows who owns a particular house. Wouldn't that create chaos?
>As an analogy, I'm imagining a country where there is no reliable municipal property registry, and no one knows who owns a particular house. Wouldn't that create chaos?
That's basically how it works in many (most?) US states. There's no authoritative record of all claims on a property. Land registries exist, but they're not authoritative. Liens can exist without being registered on it, and surface later. Hence the need for "title insurance".
