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High frequency trader here: This is only looking at the volume on public exchanges. There are a lot of regulations around public exchanges which prevent them f

High frequency trader here: This is only looking at the volume on public exchanges. There are a lot of regulations around public exchanges which prevent them from operating efficiently. For instance, unless the stock has a very small price, you cannot offer sub-penny prices on this exchange. Most retail trades actually never see the exchange, they are sold in bulk by brokers to places like Knight or Getco who internalize the order flow. They cross customer orders and take on some orders. Since this does not happen on a public exchange, they can give sub-penny price improvements. The same happen with dark pools where many hedge funds will send their trade to obtain better executions. When the market makers who handle these order flow start carrying to much risk on their book, or if they don't want to take the opposite side of your trade, they send it to the stock exchange. This means that the stock exchange is mostly a place where high-frequency traders meet to offset their exposures to one another. In this respect, it is not surprising, nor problematic that 70% of the volume come from HFT.

josh2600 14y ago
Yeah. I don't think it's surprising either, in fact when I was first writing the post I assumed HFT volume was closer to 95% of trade volume but I couldn't find any public numbers above 70%. I think that dark pools are where the next crash will come from, but I'm by no means a financial wizard. The way I perceive it, dark pools and other nearly-invisible investment exchanges are scary in that the ramifications of dark pool trading can spill over into the light world (as it were) with dire consequences. We'll see, I'm also thinking that the next crash could just as easily be caused by a rogue algorithm as a rogue trader.
- elemeno 14y ago
  Dark pools sound more ominous than they often really are. Most of the time, it's just trades that are done directly between two instituions (often via a broker-dealer like BGC or ICAP) rather than via an exchange.
- KMag 14y ago
  Maybe you actually know a lot about dark pools, but by expressing fear without expressing knowledge, you give the impression that you're mostly afraid because the name "dark pool" sounds like some kind of unregulated secret exchange run out of a meat locker by the Russian mafia. I think Kid Dynamite (a retired trader, non-HFT) has some pretty reasonable articles about dark pools: http://kiddynamitesworld.com/dark-pools-are-not-scary-shady-places-that-rip-off-average-investors/ http://kiddynamitesworld.com/dark-pools-are-not-scary-shady-... Disclaimer: my employer helps mutual funds, pension funds, universities, etc. place large orders on the market, using a variety of techniques (including dark pools) to try and smooth out the market impact of these big trades and minimize the the amount clients lose to market participants who are trying to anticipate their short-term trading behavior.
  - josh2600 14y ago
    Yes, I am aware of what dark pools are, and I'm not trying to imply fear. It's irrational to fear things you can't change, and it's unreasonable for me to deplore someone else allocating their money in an interesting fashion. I don't mean Dark pools are inherently bad because they're dark. These Dark pools expose society to unmanaged risk because of the implicit guarantees of support from the general population. It's not so much evil as it is secret, and secrets with public shares are interesting secrets indeed. As I said, I don't live in fear of Dark pools or any financial instrument, but it's important to understand that there is a significant difference between the normal sale and purchase of securities and the activity which happens in Dark pools. Otherwise there would be no need to draw a distinction.
jasonwatkinspdx 14y ago
That all makes sense, but I would argue that we're still losing something very important. There is a natural tension between intermediaries and suppliers in highly transparent and competitive markets. The threat of disintermediation minimizes rent seeking behaviors. Over the last few decades that threat seems very weak in the financial markets, which I believe will have negative consequences for our economy and society.

josh2600 14y ago

Yeah. I don't think it's surprising either, in fact when I was first writing the post I assumed HFT volume was closer to 95% of trade volume but I couldn't find any public numbers above 70%. I think that dark pools are where the next crash will come from, but I'm by no means a financial wizard. The way I perceive it, dark pools and other nearly-invisible investment exchanges are scary in that the ramifications of dark pool trading can spill over into the light world (as it were) with dire consequences. We'll see, I'm also thinking that the next crash could just as easily be caused by a rogue algorithm as a rogue trader.

elemeno 14y ago
Dark pools sound more ominous than they often really are. Most of the time, it's just trades that are done directly between two instituions (often via a broker-dealer like BGC or ICAP) rather than via an exchange.
KMag 14y ago
Maybe you actually know a lot about dark pools, but by expressing fear without expressing knowledge, you give the impression that you're mostly afraid because the name "dark pool" sounds like some kind of unregulated secret exchange run out of a meat locker by the Russian mafia. I think Kid Dynamite (a retired trader, non-HFT) has some pretty reasonable articles about dark pools: http://kiddynamitesworld.com/dark-pools-are-not-scary-shady-places-that-rip-off-average-investors/ http://kiddynamitesworld.com/dark-pools-are-not-scary-shady-... Disclaimer: my employer helps mutual funds, pension funds, universities, etc. place large orders on the market, using a variety of techniques (including dark pools) to try and smooth out the market impact of these big trades and minimize the the amount clients lose to market participants who are trying to anticipate their short-term trading behavior.
- josh2600 14y ago
  Yes, I am aware of what dark pools are, and I'm not trying to imply fear. It's irrational to fear things you can't change, and it's unreasonable for me to deplore someone else allocating their money in an interesting fashion. I don't mean Dark pools are inherently bad because they're dark. These Dark pools expose society to unmanaged risk because of the implicit guarantees of support from the general population. It's not so much evil as it is secret, and secrets with public shares are interesting secrets indeed. As I said, I don't live in fear of Dark pools or any financial instrument, but it's important to understand that there is a significant difference between the normal sale and purchase of securities and the activity which happens in Dark pools. Otherwise there would be no need to draw a distinction.

jasonwatkinspdx 14y ago

That all makes sense, but I would argue that we're still losing something very important. There is a natural tension between intermediaries and suppliers in highly transparent and competitive markets. The threat of disintermediation minimizes rent seeking behaviors. Over the last few decades that threat seems very weak in the financial markets, which I believe will have negative consequences for our economy and society.