>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...)
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.
[1] https://en.wikipedia.org/wiki/Over-the-counter_(finance)