

The Dark Pool Iceberg - helper
http://www.nytimes.com/2014/06/29/opinion/sunday/lawsuit-against-barclays-shows-need-for-more-scrutiny.html

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marcinw
Matt Levine sheds more light on this story[1], backed by evidence whereas the
NYTimes is just hearsay. Why would Barclay's screw over institutional
investors who account for a large majority of their $4 billion in revenue for
HFT who bring in only $3 million? Because without HFT (which is a bad, bad
word to the ATG's ears), nobody would be trading on it, and nobody wants to
admit that. It just doesn't make sense.

[1] [http://www.bloombergview.com/articles/2014-06-26/barclays-
no...](http://www.bloombergview.com/articles/2014-06-26/barclays-not-smart)

~~~
Mandatum
I don't understand how a darkpool could exist without rogue HF traders bumping
up the revenue from stock trades. If the current stock market won't allow for
it, what makes them think a private market will? At the end of the day whoever
operates the pool has to foot the bill if they're trading outside of the
official exchange.. Unless they turn it into a Ponzi-type scenario or outright
lie to their investors.

~~~
kasey_junk
The basic theory of a dark pool is that by restricting who can access the
other participants in the market, you can provide for your dark pool's clients
better execution costs.

That is, by only allowing similar market participants (think other hedge
funds, pension funds, etc) and excluding "predatory" speculative market
participants (HFT, day traders, pit traders, etc.) you can match "natural"
trades to each other, without paying the middle man.

In reality, this never happens. Speculative "predatory" traders are a
necessary component of the market and without them there isn't sufficient
liquidity for the market to operate.

In this particular case, an ibank stands accused of lying about this
fundamental fact to their clients. It has nothing to do with the underlying
validity of the market structure.

~~~
Retric
HFT add liquidity on a second by second basis, but nothing on even a short
term basis. Market makers speed up transactions slightly, but the cost for
doing so is vary high.

~~~
tptacek
Citation needed.

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jackgavigan
It's ironic that the "dark" in "dark pool" is now being interpreted in a
negative manner, synonomous with "opaque".

The reason such pools are dark is to reduce the market impact of large orders.
If an institutional investor (e.g. a pension fund) were to announce to the
world "We are going to sell a shitload of Apple shares tomorrow!", the Apple
share price would fall, as everyone front-ran the trade. That would result in
a lower price for the pension fund when it actually got around to selling its
shares. Regulators actually recognise the advantages in reducing market impact
and they specifically allow delays in reporting large, off-exchange trades
between clients and broker-dealers to the market for that reason.

Dark pools were conceived of as a mechanism to allow institutional investors
to trade off-exchange (in theory, with one another), so that they didn't have
to post bid orders publicly on the "lit" exchange. The reason they're called
"dark pools" is because you can't see the order book, so you don't get to see
big orders being added to the book (and take advantage of the knowledge that
someone's just placed a big order, to front-run them). In other words, you
don't know how deep the pool (i.e. the liquidity on the order book) is - just
like you can't see how deep a dark pool of water is.

As someone who works in financial markets, it's weirdly fascinating to watch
terms like "dark pools" and HFT end up being used as epithets, almost, by the
media.

It's a bit like how the word "hacker" came to be regarded by many as
describing a computer criminal.

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kasey_junk
Another take on the story from someone who has worked both the buy side and
the sell side:

[http://kiddynamitesworld.com/hear-g-schneiderman-going-
barcl...](http://kiddynamitesworld.com/hear-g-schneiderman-going-barclays-
dark-pool/)

~~~
sireat
That author seems to think that this was okay behaviour by Barclays, because
the clients had choices and could think for themselves(ie caveat emptor)

I do not see how lying to your clients about the type of pool you have is ok.
If it is necessary to have some HFT operators in your pool then do not be a
chicken and come out and say so. Is honesty not the best policy anymore?

You can be getting the best deals(fills in this case) and still feel like
getting a bad deal. It is human psychology.

Let's say you find the best deal on a specific car for $10,000. Dealer claims
that you are not paying any dealer markup over retail. However, later you find
out that there was a special promotion from manufacturer, where dealer got the
cars for $1,000. Even though you realize this was not something you could get
yourself you would still feel miffed that you were not given a larger
discount.

I admit my example doesn't have very realistic numbers.

~~~
kasey_junk
I think he pretty clearly comes down against false advertising and giving up
your fiduciary duty to your clients. Those are the real issues in the court
case.

His main point, and one that seems to be missing in most articles about dark
pools, hft, etc. is that buy side investors are as sophisticated (or should be
if they are to get away with charging their crazy management fees) as sell
side participants. The whole reason they have high paying finance jobs is to
provide to their clients the service of making sure they are getting the best
execution they can.

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mindcrime
Strangely enough, I had never heard of a "darkpool" until today. I bought
_Flash Boys_ at the airport bookstore earlier, and read it on the plane just
now. And tonight I find a reference to darkpools on the HN front-page. Hmmm.
Truth really is stranger than fiction sometimes.

Anyway, FWIW, if anybody here hasn't read _Flash Boys_ by Michael Lewis, it's
a pretty interesting read that covers some ground related to the content of
this article: HFT, dark-pools, etc. I understand that it's not without some
controversy, but I found it damn interesting all the same.

~~~
kasey_junk
As someone who has worked in the industry, Flash Boys is literally the worst
intro you could find into electronic trading. Dark Pools by Scott Patterson is
much, much better (and even it gets basic facts incorrect).

~~~
azmenthe
Agreed, as someone who worked in HFT and thus has a positive bias towards it,
I found Dark Pools to be an extremely informative and factual historical
account of the industry even if the author's opinions disagree with mine.

Flash Boys however I can't even get through because the author backs an
extremist negative position with completely incorrect facts. I fill with
seething rage every time I realize how much more public exposure Flash Boys
gets.

~~~
kasey_junk
I wouldn't say he backs an extremist negative position. In fact, if you read
carefully, he is quite adamant in his assertion that HFT is great. As long as
it is in the service of large buy side institutions he has no problem with it.
If on the other hand, HFT firms dare to upend the relationship with
traditional ibanks, then he gets upset.

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solaarphunk
Surprise-surprise, HFTs can also be marketmarkers and bridge the imbalance of
arrival rates of buyers and sellers!

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w_t_payne
You can't trust people. Even supposedly-trustworthy people working for
supposedly-trustworthy household-name financial institutions like Barclays.
What then can we trust? Technologies like BitCoin are predecated on the idea
that we can trust mathematics and peer-reviewed logic. Are these mechanisms
inherently more trustworthy than individual humans and human institutions? If
this is truly the case, then the argument for financial intermediation to be
founded on a similar technological basis is an exceptionally strong one.
Anybody else interested in following this rabbit hole to see where it leads?

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wernerb
Micheal Lewis explains dark pools and HFT's quite well in his new book Flash
Boys [1].

[1] [http://www.amazon.com/Flash-Boys-Wall-Street-
Revolt/dp/03932...](http://www.amazon.com/Flash-Boys-Wall-Street-
Revolt/dp/0393244660)

~~~
kasey_junk
No he doesn't. Either through ignorance, incompetence, or malice he wrote a
pretty terrible book about dark pools and HFTs. Dark Pools by Patterson is
much better and even it misses on lots of details.

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quattrofan
Here we go again, and still not a single executive is in prison for financial
misdeeds the last few years.

~~~
hueving
I'm not terribly familiar with the legal system, but I do believe you have to
be convicted of a crime to be sentenced to prison.

