
Dark Pools Turned Out to Be Really Murky - tptacek
http://www.bloombergview.com/articles/2016-02-01/dark-pools-turned-out-to-be-really-murky
======
tptacek
_Instead, it used a quantitative system called "Liquidity Profiling," similar
to Light Pool's "Alpha Formula" and Crossfinder's "alpha scoring." These
systems were all basically efforts to answer the following question: When you
buy stock, does the price go up or down? If it goes up -- in the next very
short period, say one second -- then you have positive alpha. If it goes down,
you have negative alpha. If you regularly have a lot of positive alpha, you
are Bad, and people shouldn't want to trade with you. If you regularly have a
lot of negative alpha, people will be delighted to trade with you. But then,
if you regularly have a lot of negative alpha, you should stop trading because
you keep losing money._

This is so awesome.

~~~
jvoorhis
Matt Levine has quite a talent for describing markets in plain English.

~~~
elcapitan
Absolutely. This reminded me to subscribe his complete rss feed, before that I
had just the 'Money Stuff' feed in my reader.

------
zekevermillion
The prevailing attitude on Wall Street is that there is no such thing as
predatory behavior. Or rather, that predation is part of the market ecosystem
and to be viewed in a value-neutral light. People used to say that any offer
to buy or sell provides a service to the market by adding information about
price. But now everyone, not just expert traders, has to acknowledge that most
modern operations that are mature in their use of math actually seek to add
_disinformation_ to the market. I would suggest a yet more sophisticated view
is that multiple sources of randomness should be better for the market than
fewer. As you can see superficially in the article about Light Pool,
attempting to limit the entropy in this pool does not help make the pool more
"fair" or "rational". It would be better, as in more sustainable, for dark
pools and electronic markets as a whole to refrain from dictating what is an
acceptable algorithm.

Many people read Flash Boys and applaud the notion of a rate-limited or
otherwise restricted exchange platform that removes the advantage of network
proximity for low latency info. I think we will find in another decade that
exchanges built on this principle introduce a host of other inefficiencies,
both time- and information- based arbitrage strategies that appear unfair to
some market participants.

~~~
tomp
Each trade is information. Trading can only come from disagreement, so each
time you trade with someone, it's basically as if someone was screaming
"you're stupid" in your face. Of course, you hope they're wrong and you're
right (they're hoping the opposite).

------
wallacoloo
So I see the issue here is one of integrity - claiming to enforce one policy
when you're really enforcing a different one.

But why are High Frequency Traders "bad"? Like, do they significantly
destabilize the platforms they use? Or is it just that they make profit, and
thus the other users of the exchange are losing money? And if it's the latter,
how is that not completely illogical? In order for you to make a profit when
trading, somebody else needs to lose money. If you ban everyone who profits
from the exchange, then there cannot _be_ an exchange, right?

This is probably ECON 101 stuff right here - I probably sound clueless, and
it's because I am. Please help this poor, confused lad out?

~~~
andrewksl
It's probably not right to classify all HFT as unscrupulous. However, consider
the kind of algorithm that picks up when you're looking for a big amount of
stock X, and then proceeds to race you to the other exchanges in an effort to
buy from under you; it's pretty hard to justify that as anything other than
predatory.

Making money from speculation (i.e. investing) is one thing, but gaming the
system for profit is something else entirely, and something that quite
inarguably does not add value.

~~~
wallacoloo
Thanks for the great example. It definitely clears up some of my confusion.

------
tonyjstark
The article reminds me of the book Flash Boys by Michael Lewis. Lewis also
describes what was going on (and maybe still is) at the Wall Street with dark
pools, HFT and normal traders. Definitely worth the read.

EDIT: maybe I should've read the article to the end before commenting. But my
recommendation for Flash Boys stands. It is a good book.

~~~
lmm
Many of us felt Flash Boys got it wrong; Levine is careful not to be too
critical of his colleague but certainly gives that impression. (The "Shilling
for the buy side" article that was posted here shortly after it came out
covers much of the criticism).

~~~
tonyjstark
Thanks for the suggestion of 'Shilling for the buy side', really interesting
read besides the many insults. I especially like the many links for even more
information. I try to gobble up as much as I can, the stock market is
extremely fascinating and interesting. Of course Flash Boys is quite one sided
and as it is with most things you should read it with a grain of salt. It's
entertaining though.

------
tempodox
I didn't know stock trading can be so interesting. It tickles my inner
detective.

