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Ok, a few points. 1) most institutional clients don't necessarily want to trade in a dark pool, their orders are just routed there by the broker's smart order

Ok, a few points. 1) most institutional clients don't necessarily want to trade in a dark pool, their orders are just routed there by the broker's smart order routers. You would be very surprised how many huge funds don't do post trade analysis. 2) the dark pool operators make money from the HFT's not in terms of the commission, but in terms of collocating fees, market data fees, and the right to be one of only a few HFTs allowed in the dark pool via collocating, ie exclusivity. The boat loads of money was maybe an akward of stating it. To match a trade you need people on both sides of the trade. The HFTs were the missing piece the other side of the trade. WIthout them no trades, hence no money. With them, you trade more... alot more, which leads to the boat load of money that starts following when the HFTs come in. I may have a biased view as I'm on the buy side but not on the HFT end of things:)

tptacek 12y ago
Are they getting routed there because the dark pool can provide better execution for those orders? Because that could be happening even if the way it's happening under the hood is contrary to how the pools are marketed.
- hft_throwaway 12y ago
  It likely was happening. If I'm a market-maker, I want to trade with retail orders or slowly sliced institutional orders that are trying to rebalance a portfolio throughout the day. When I sell stock to them, the price doesn't move very much in the short-term and I have a chance to buy back on the bid to make a spread. I don't want to trade with aggressive arbitrage or stat-arb traders capturing short-term price inefficiencies, hedge funds that want to buy huge blocks of stock all at once, etc. If I sell stock to them, the price ends up moving up more than the spread very rapidly and I lose money. When trading on a public market, I have no way to control which of these groups I trade with. I have to employ countermeasures to predict whether it's likely that I'll trade with an informed or uninformed trader and adjust my market accordingly. This is why you see market-makers rapidly flash their quotes for seemingly pointless reasons (e.g. I may adjust my prices in an airline when oil futures move) or flip out of positions aggressively when their model believes they were hit by an informed trader. Now if I'm able to trade on a market where I know I'll only trade with long-term fundamental traders, I can quote much larger, tighter, and more stable markets. This is good for the institutions since their execution costs are lower than going to the exchanges. It's bad for arbitrage traders and hedge funds with short-term information since they effectively pay higher execution costs in a tiered market (if more "good" order flow goes to dark pools, less reaches displayed markets, and spreads on displayed markets will increase to compensate). When people want to end dark trading or internalization, they really want to have retail and institutional flow cross-subsidize fast speculators. Ironically, it's probably HFT market-making firms who were the most impacted by Barclays giving other high-alpha HFT firms manual overrides to put them in a lower tier. If anyone would be excited at the promise of removing high-alpha traders from the pool, it would be market-makers who want to avoid being "picked off", not institutions who have a much longer time horizon.
dev_jim 12y ago
Sorry, you are mixing and matching concepts from reading too many articles on HFT. > the dark pool operators make money from the HFT's not in terms of the commission, but in terms of collocating fees, No. Dark pool don't really charge collocation fees. Barclays LX didn't. Most dark pools are in Weehawken and it's just a simple $500 cross-connect from your existing trading system. > market data fees It's a dark pool. There is no market data to charge a fee from. > , and the right to be one of only a few HFTs allowed in the dark pool via collocating, ie exclusivity. Not in the case of Barclays LX. They let every HFT in at very low rates which is the entire point of the article.
- thedufer 12y ago
  From the article: > Barclays was advertising LX to high-frequency traders by offering them more information, lower fees, and faster connections than it gave to institutional investors. The "more information" being the key part - it sounds like the pools weren't as dark as their customers were led to believe. Your other points are spot on, though.
  - minimax 12y ago
    If Barclays was displaying resting orders to HFTs in LX, the AG wouldn't beat around the bush about it in the complaint. It would have been the headline issue. Doesn't seem likely that was the case.

tptacek 12y ago

Are they getting routed there because the dark pool can provide better execution for those orders? Because that could be happening even if the way it's happening under the hood is contrary to how the pools are marketed.

hft_throwaway 12y ago
It likely was happening. If I'm a market-maker, I want to trade with retail orders or slowly sliced institutional orders that are trying to rebalance a portfolio throughout the day. When I sell stock to them, the price doesn't move very much in the short-term and I have a chance to buy back on the bid to make a spread. I don't want to trade with aggressive arbitrage or stat-arb traders capturing short-term price inefficiencies, hedge funds that want to buy huge blocks of stock all at once, etc. If I sell stock to them, the price ends up moving up more than the spread very rapidly and I lose money. When trading on a public market, I have no way to control which of these groups I trade with. I have to employ countermeasures to predict whether it's likely that I'll trade with an informed or uninformed trader and adjust my market accordingly. This is why you see market-makers rapidly flash their quotes for seemingly pointless reasons (e.g. I may adjust my prices in an airline when oil futures move) or flip out of positions aggressively when their model believes they were hit by an informed trader. Now if I'm able to trade on a market where I know I'll only trade with long-term fundamental traders, I can quote much larger, tighter, and more stable markets. This is good for the institutions since their execution costs are lower than going to the exchanges. It's bad for arbitrage traders and hedge funds with short-term information since they effectively pay higher execution costs in a tiered market (if more "good" order flow goes to dark pools, less reaches displayed markets, and spreads on displayed markets will increase to compensate). When people want to end dark trading or internalization, they really want to have retail and institutional flow cross-subsidize fast speculators. Ironically, it's probably HFT market-making firms who were the most impacted by Barclays giving other high-alpha HFT firms manual overrides to put them in a lower tier. If anyone would be excited at the promise of removing high-alpha traders from the pool, it would be market-makers who want to avoid being "picked off", not institutions who have a much longer time horizon.

dev_jim 12y ago

Sorry, you are mixing and matching concepts from reading too many articles on HFT. > the dark pool operators make money from the HFT's not in terms of the commission, but in terms of collocating fees, No. Dark pool don't really charge collocation fees. Barclays LX didn't. Most dark pools are in Weehawken and it's just a simple $500 cross-connect from your existing trading system. > market data fees It's a dark pool. There is no market data to charge a fee from. > , and the right to be one of only a few HFTs allowed in the dark pool via collocating, ie exclusivity. Not in the case of Barclays LX. They let every HFT in at very low rates which is the entire point of the article.

thedufer 12y ago
From the article: > Barclays was advertising LX to high-frequency traders by offering them more information, lower fees, and faster connections than it gave to institutional investors. The "more information" being the key part - it sounds like the pools weren't as dark as their customers were led to believe. Your other points are spot on, though.
- minimax 12y ago
  If Barclays was displaying resting orders to HFTs in LX, the AG wouldn't beat around the bush about it in the complaint. It would have been the headline issue. Doesn't seem likely that was the case.