4 ms·

> won't impact prices 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

> won't impact prices 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.

dudeinjapan 2y ago
[dead]
deleted 2y ago
[deleted]
gruez 2y ago
>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?
- derf_ 2y ago
  These kinds of wealth transfers have been studied, and you do not need dark pools for them, just predictable trading patterns. See, e.g., https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5080459 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5080459 on index funds or https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5122748 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5122748 on funds that maintain a certain ratio of stocks to bonds (e.g., target-date funds). These costs can be larger than the actual management fees of the funds.
  - Dylan16807 2y ago
    The evidence being asked for is that dark pools and rooms will increase this effect.
- jart 2y ago
  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.
JedMartin 2y ago
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.
- whatshisface 2y ago
  Instead of demanding that your counterparty be uninformed, why not do a market open/close auction every minute?
  - Onavo 2y ago
    Because others may benefit from exploiting your big orders.
  - JumpCrisscross 2y ago
    > why not do a market open/close auction every minute? Reality moves faster. That means whoever can price closer to the auction can incorporate more information.
    - modderation 2y ago
      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.
woleium 2y ago
right? How is this different from standard OTC trading?
entangledqubit 2y ago
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.
hibikir 2y ago
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.
- goodcanadian 2y ago
  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.
- lucianbr 2y ago
  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?
  - infecto 2y ago
    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.
throwaway2037 2y ago
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.
petesergeant 2y ago
> 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.
dkjaudyeqooe 2y ago
> 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.
- matthewdgreen 2y ago
  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.
TuringNYC 2y ago
>> 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. You are speaking about the index rebalance strategy. Worked well, but does not always work well: https://www.bloomberg.com/news/articles/2025-03-08/millennium-loses-900-million-on-strategy-roiled-by-market-chaos https://www.bloomberg.com/news/articles/2025-03-08/millenniu...
LewisVerstappen 2y ago
Everything you “suspect” is completely wrong

dudeinjapan 2y ago

[dead]

deleted 2y ago

[deleted]

gruez 2y ago

>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?

derf_ 2y ago
These kinds of wealth transfers have been studied, and you do not need dark pools for them, just predictable trading patterns. See, e.g., https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5080459 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5080459 on index funds or https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5122748 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5122748 on funds that maintain a certain ratio of stocks to bonds (e.g., target-date funds). These costs can be larger than the actual management fees of the funds.
- Dylan16807 2y ago
  The evidence being asked for is that dark pools and rooms will increase this effect.
jart 2y ago
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.

JedMartin 2y ago

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.

whatshisface 2y ago
Instead of demanding that your counterparty be uninformed, why not do a market open/close auction every minute?
- Onavo 2y ago
  Because others may benefit from exploiting your big orders.
- JumpCrisscross 2y ago
  > why not do a market open/close auction every minute? Reality moves faster. That means whoever can price closer to the auction can incorporate more information.
  - modderation 2y ago
    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.

woleium 2y ago

right? How is this different from standard OTC trading?

entangledqubit 2y ago

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.

hibikir 2y ago

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.

goodcanadian 2y ago
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.
lucianbr 2y ago
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?
- infecto 2y ago
  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.

throwaway2037 2y ago

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.

petesergeant 2y ago

> 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.

dkjaudyeqooe 2y ago

> 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.

matthewdgreen 2y ago
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.

TuringNYC 2y ago

>> 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. You are speaking about the index rebalance strategy. Worked well, but does not always work well: https://www.bloomberg.com/news/articles/2025-03-08/millennium-loses-900-million-on-strategy-roiled-by-market-chaos https://www.bloomberg.com/news/articles/2025-03-08/millenniu...

LewisVerstappen 2y ago

Everything you “suspect” is completely wrong