It is not clear to me what nefarious things people believe are going on there that we should be worried about.
All the article says is that people are doing things we don't know about, but implies that somehow we should feel not-okay about this.
I don't know what's going on in my neighbor's house either, and it could certainly be bad stuff, but that's doesn't mean that it is bad or that I should start spying on them.
If you look up RegNMS the goal is to make public markets fair by having rules that have to be met in order to trade. Dark pools allow participants to 'hide' information that's not public. It is mostly about the order books. If dark pool sell order for 1B of TSLA stock goes on the order book, only other members of the pool get that information. The dark pools are required to still follow RegNMS rules for trade prices, but there is an inherent asymmetry in the market information in this case as the dark pool participants can see the public markets and their dark pool in order to make trading decisions.
In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
And what would the problem be with that example? It seems everyone has agreed on a fair price and is trading on it. There isn't any incentive for the private traders to trade at a different price or one of them is getting ripped off due to the arbitrage potential. And they don't believe that publicising the trade would move the price or - again - one of them would have an incentive to do so because it'd move in their favour.
I don't see how I'd be disadvantaged as any actor in that scene.
You are disadvantaged as an outsider because you don't know who is buying or selling and how much they are trading. You don't know the demand levels at various price points. If, for example, you want to buy Stock A which is currently trading for $5 and sell it for $6, but there is someone trying to sell 5 million shares for $5.05 but you can't see that you can't make an informed decision on ideal price points for your trade.
Although the above example was missing some details, I suspected it was meant to illustrate the following effect:
The public last price was $5, so bid/ask will be around that price let's say 4.99/5.01, if you buy with a market order you'd pay approximately $5 ($5.01).
But if there is a new large sell order for 5 million shares at 5.05, then the market would react to this information and adjust bids & asks.
For illustrative purposes it could be possible (if the 5 million order is rather large in comparison), that the new bid/ask would be 4.89/4.91 and you'd get your shares for around $4.9.
That is irrational. It suggests every time someone sees a market price at $5 they could put in an enormous fake sell order for shares at $5.05 to buy shares at $4.90 then cancel the fake order, which makes no sense. "The market" is giving away freebies in an insane way.
If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.
>If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.
Except that the market is all game theory. If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.
I design some financial software and the best way to think about it is to abstract away the idea of money and numbers. Think of it as a maze and every stock and price point combination is a doorway.
Normally a door, when you open it, you can see down the hallway to how long the next door is without actually entering the hallway. (In the stock market this is called Level II data) the impact of dark pools is that when you open a door you can't see how long it is. Except that it looks like every other hallway with a defined length, but you don't know that it is a hallway that keeps going for an undetermined amount of time. There's no way to figure out the length without entering the hallway and going as far as you can until you either reach the end or become exhausted (Not a great way to solve a maze).
Without access to the dark pool the best you can do is enter the hallway and figure out it doesn't behave as expected and move away from it.
It's a significant advantage when you are playing against other people to see the complete picture of the maze at any given time. There are entire teams of PhDs working to decode the positions of dark pools they don't have access to by analyzing option data.
> If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.
Your basic argument there seems is "new information can cause the price to move at random". And I accept that. But it doesn't matter to anyone on the lit market because the trades on the dark market would help or hinder them at random if they were publicised. If there isn't a systemic bias then it is just noise, I have a choice between the price on the lit market or ... the price on the lit market plus some random variable that might be positive or negative. It doesn't change how much money I expect to make. I'm not at any sort of disadvantage.
It doesn't change my ability to value my trades and it doesn't cause me to think I'm going to be better or worse off. We already know that distinct market participants have different knowledge and world models. There isn't anything here that it is useful to adjust.
> Think of it as a maze and every stock and price point combination is a doorway.
This explanation literally makes no sense to me; I don't see how it matters. Someone offers to buy at $X/sell at $Y. Someone else chooses to take the other side of the trade or not. It is only that weirdly complex if you want it to be.
If you need omniscient knowledge of the market structure to value a good then it isn't possible to trade it because your knowledge is always lacking information that is relevant to valuations. For example, you can't know about orders that are about to be lodged in the immediate future. We all have to operate with the understanding that some other market participants know things we don't and value things differently. It doesn't make the trading environment unfair.
You seem to have a traders perspective here where you want to turn a turn an asymmetry of nearly irrelevant information into profit. I'm cool with that, but I don't care if it works or not. It sounds like a zero-sum game, someone is going to lose. and I don't see why I should be phased about who or why. I just want the market to offer to buy/sell things at a fair price. Dark pools don't seem to influence that in any way, the incentives mean that the price signalling should be basically honest.
Why would volume outside of the NBBO force price down? I think you are also over weighting order book impact to price. There is definitely some information there but with its not always that meaningful.
Because you want to move ahead of the 5.05 seller and be sure your shares can sell for $4.90. If the $5.05 seller is trying to sell 5 million, but it's taking a long time. They might drop down to $4.85 or something. It's all game theory and predicting what others will do. A big part of that is having all of the information.
You are not disadvantaged because you are not buying 5mm shares. I like to think of it closer to volume pricing rather secret pricing. You could definitely do retail level volume on a pool but you will be paying for it and that cost will generally be higher than any "savings" you may get in price.
Its similar to complaining that someone is buying eggs at wholesales prices while you are paying retail.
Its more like 50% of total volume being traded in dark pools. Your price argument does not make much sense though, the beauty of western markets is that folks are so opportunistic that someone will exploit any information asymmetry so your argument would not hold up. Also at the end of the day its not like buyers and sellers in a dark pool know "the price" of what they are trading, sure they have ideas of where they might be buyers and sellers but they are still using the lit market data to inform their decision.
but people trading inside the house would know this already. If they suspect that the fair price is being manipulated, why would they continue to buy inside the house?
> If you look up RegNMS the goal is to make public markets fair by having rules that have to be met in order to trade
That was the goal and it failed at it in everything but the most technical sense. Why two people coming to a handshake deal about the price of their property is illegal is insane. I previously bought the argument about propensity for fraud. But if we’re normalising crypto, there is zero need to continue treating stock like it’s radioactive.
> In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
Isn't that how everything is traded? Am I supposed to be outraged that everything I buy retail also exists in a wholesale market?
For these institutional traders, the pools offer them opportunities to trade with a small set of counter parties that also have deep deep liquidity, so in a sense it is kind of like the wholesale markets for retail. Orders hit the book in the pool and they don't have to worry about 'current retail' stock and can trade massive blocks with trade certainty.
>Dark pools allow participants to 'hide' information that's not public. It is mostly about the order books. If dark pool sell order for 1B of TSLA stock goes on the order book, only other members of the pool get that information. The dark pools are required to still follow RegNMS rules for trade prices, but there is an inherent asymmetry in the market information in this case as the dark pool participants can see the public markets and their dark pool in order to make trading decisions.
But traders can easily hide the size of their "true" order by breaking it up into chunks and constantly refilling the order if it's taken? This is basically trading 101. If you want to do a big selloff, you're not going to dump all of that in one order.
But by breaking up the order they have to wait and the market can move in reaction to their sell off unless they do it very slowly. Dark pools can completely hide a large sell or buy order from the market long enough to execute at the current strike if there's another member in the pool buying. They wouldn't use it if it didn't give them an advantage because it costs more than regular trades.
>But by breaking up the order they have to wait and the market can move in reaction to their sell off unless they do it very slowly
it kinda works out because the other side is also smart and will also break up their orders. Putting in a massive buy order is a good way to pay through the nose.
>In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
I mean, that's literally what happens with trading cards. It's super common to base face-to-face deals (whether for cash or trades) on internet pricing, including very big ones. (the trading card market is a lot less liquid, though, so it's also common for there to be a fairly big discount or premium on those prices in the deal for various reasons)
It's manipulation by definition. These hidden trades exist to prevent other people from being able to act in their own best interest based on available information. This isn't about what's going on in your neighbor's house. Your neighbor's house is private, markets are public. This is about being at a public auction in the middle of bidding on something when someone else walks up to the crier, whispers a few words in his ear, and then the crier just quietly says "bidding is closed" and you have no idea who bought the item or for what price but now you have to try to price similar items.
In the case of Dark Pools, it would actually be the crier saying "a lot 10x the size of what I'm auctioning just traded somewhere else where none of you lot can trade for xx price". So after they say that you actually do know the price that they bought the item(s). This is since the dark pools have requirements to report to the trade tapes their trades in fairly similar latency to the exchanges themselves.
EDIT: The rules also dictate the allowed prices the dark pools trade at. They have to be within the national BBO, they can't just trade at whatever price they want. So the public auction is actually helping them find the prices, without their pre-trade information affecting the price before execution.
Not manipulation as most/all of these execute around the NBBO. Exceptions exist for extreme block trades that may give some price advantage do to the sheer scale but we are not talking about manipulation.
I can easily see the retail price of a good, I can go to a wholesaler or some other holder of this good and ask them if I can buy it at a cheaper price. They might tell me to kick rocks if I don't have volume. Pretty similar to a dark pool. Markets are both private and public everywhere.
Your analogy is bad because this doesn't happen at a public place. People can't privately sell goods between each other. If someone someone sells their gold to a gold buying shop, that was not a public auction, yet people are still able to price gold.
>It's manipulation by definition. These hidden trades exist to prevent other people from being able to act in their own best interest based on available information.
So if I have a RTX 4090 to sell (a very sought after commodity these days), and I sell it to my buddy rather than listing it on ebay, I'm doing market "manipulation"?
Most things are different from each other. Why does that difference matter in this case? It looks a lot like traders trading in a market. That isn't manipulation.
That isn't so; I looked up an RTX 4090 on Ebay [0]. The only information I see related to depreciation is "Used: An item that has been used previously" and a representation from the seller that they weren't using it for crypto, suggesting that the seller (and the buyer; this looks like a standard graphics card listing to me) are treating used graphics cards as fungible.
If it causes "no liquidity" in the open market because nvidia (tsmc) can only produce so many GPUs / month and that causes nvidia's other cards to have a street price of 2x MSRP due to lack of availability? I would say yes.. It's just that "H100" or "RTX 5090" is not a registered stock with the SEC, so there aren't specific laws / penalties for manipulating the GPU market.
Same as "10 per store" limits when PS5s or whatever are in short supply, but then the CEO calls up the warehouse to get one for every student in their kid's class.
It's insider trading, just with a different class of insiders (i.e. first level of insiders are people associated with the company itself, and the second level of insiders are Wall Street traders with access to non-public pricing signals).
Insider trading is illegal because it undermines faith in the fairness of the public market. If insider trading is legal, then market actions by insiders are almost guaranteed to result in the action being a poor deal for the other side. Either the insider is buying shares because they have strong confidence that the price is about to skyrocket (i.e. prior to the announcement of a massive sales deal), in which case the prior holder lost out when they would have preferred to hold; or the insider is selling shares because they have strong confidence that the price is about to crater (i.e. announcing very poor results), in which case the person purchasing the share probably would have preferred not to buy at that price. The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result. When companies are privately held, buying and selling shares without insider knowledge (i.e. deals being conditional on due diligence) is much less common, so it's really only a concern for public markets.
Public markets absolutely depend on regulators enforcing that information asymmetry is kept to the absolute minimum possible, so that the market will be perceived as fair, so that people will continue to participate.
One of Matt Levine's common refrains is "Insider trading is not about fairness, it is about theft." There are always market participants with different levels of information. The problem occurs when you misappropriate confidential information you were entrusted with for personal gain.
I respectfully disagree with Matt Levine's framing. Yes, confidential information belongs, in a statutory sense, to the company, and using it for personal gain instead of company gain is a kind of theft, similar to an executive who uses their company car for personal trips, or any employee who might browse Facebook on a work laptop or take a personal call in a company office. But this argument is akin to saying that no senior executives should ever incur personal criminal or civil liability for the actions that they take in the name of the company, because it is the "company" that did it and not the individual. Most people (particularly after public implosions like 2008) find this argument reprehensible. In fact of the matter there are individual executives who do act in their personal interest. Should stock buybacks be illegal because it happens to be very much in the personal interest of the executive whose bonus depends on a rising stock price, while shareholders may have benefitted more from the executive focusing on day-to-day operations, thus the executive "robbed" shareholders because of making a decision to focus on the wrong thing? It's not reasonable to expect executives to "wear different hats" where one day they act out of their personal interest and the next they are some kind of selfless worker who works for The Company and whose only interests are the Board's and shareholders'. Executives are holistic individuals, they make decisions as holistic individuals, they were hired with the expectation that they would make decisions as holistic individuals, and in and of itself there is nothing wrong with that.
Rather, the theft is from the market participant who is getting the raw end of the deal. Legal trades require consent. If you sell someone a hard disk that you know crashed and is unusable, under the guise that it is working, you committed fraud. If you sell someone a new car that it turns out is going to break down almost immediately, you are subject to lemon laws and must refund or replace the car. If you had sex with someone in a case where consent was not in place, including in cases where the sex was pleasurable but the other person was defrauded to who you were (i.e. not their long-time partner), that is rape. And if you take stock that you're pretty confident is going to lose 80% of its value in three days when poor earnings will be announced, and offload it to an unsuspecting victim, no I don't think you can make the case that there is genuine consent here.
> The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result.
Finance noob question here: has this actually happened?
And related, don't non-pro traders basically always lose money on trades but still exist?
(I've been genuinely unsure why insider trading by non-decisionmakers is banned, always seemed like it would result in more accurate prices)
Please don't define things when you have no idea what you are talking about. Everything in this post is simply wrong. Markets are not about information fairness, individuals are free to do research and come up with their own prices.
Individuals are free, in their research, to access sources of information that are available to all other market participants, even if that information is usually out of reach for most people. The canonical example is using satellite photos of parking lots to predict earnings calls, i.e. https://newsroom.haas.berkeley.edu/magazine/summer-2019/stoc... . It's still legal because hypothetically anybody could do it. What's not legal is "doing research" by talking to insiders to get information that is not public.
Was this supposed to defend your position that dark pools are illegal? Full stop it does not and will never meet the definition of insider trading. Your free to believe whatever you want but it does not meet the definition and your posts offer little more than strange steps into loaded words like consent.
> I don't know what's going on in my neighbor's house either, and it could certainly be bad stuff, but that's doesn't mean that it is bad or that I should start spying on them.
Massive public investments and global finance could result in you and your neighbor losing your jobs and houses, and cost you a lot of tax dollars rescuing them. It's happened multiple times. That's why they need to be regulated.
Public, lit markets are a public good that lifts all boats. If people are feeling the need to move away from them that doesn't mean those individuals are up to no good, but it's a bad sign for the health of the system.
> Public, lit markets are a public good that lifts all boats
To a point. The benefits of millisecond-grain transparency really stretches my credulity.
Let people trade. Make them report it in a reasonable period. The folks who need millisecond granularity will find it. Most economic activity doesn’t need that, and while the liquidity is good, again, I’m not convinced it needs to be publicly disseminated in the way it is now.
Markets are supposed to be decision makers, and having pricing information be public helps firms and other allocators take better decisions. The question at hand is if the flow of information today is so fast that it deters smart decision makers because of other participants who can extract their decisions from them before they can act on them. Wether you believe markets should be more or less opaque should be decided by where you sit on this spectrum imo.
i thought these "dark pools" are visible _after_ their trades have completed.
The information about someone _wanting_ to buy or sell a large amount, is hidden via the dark pool, so that this order doesn't make the public markets move.
Great points - to put it another way, considering the data is available and investors now have the horsepower to crunch the numbers…why doesn’t Wal-Mart publish their entire inventory for every store in their system in an easy to digest CSV or whatever? Investors deserve to know!!!
Or, you know, sometimes people do business behind closed doors because day to day operations aren’t useful in many scenarios.
Isn't the problem that this allows for all kinds of forms of insider trading?
> Insider trading—the practice of buying or selling a company's securities based on material, nonpublic information—has long been a contentious issue in financial markets.
> Isn't the problem that this allows for all kinds of forms of insider trading?
No, it doesn't. All trades are made public after they happen, as per regulations. There is no difference to insider trading regulations if a bad actor trades via a lit exchange or via a dark pool. Dark pools only "hide" pre-trade information, such as standing buy or sell limit orders.
It stands to reason that if the buyer/seller are seeking private rooms there is something unfavorable for them about "lit" trading. That alone should raise red flags.
That raises red flags that the standard market regulations are bad - they are signalling that they believe an exchange with different rules is better for both traders. That would be bad for all the traders stuck on the exchange with inferior rules, but the solution is to reform the standard exchange.
Probably trying to get away from HFT if I were going to guess blindly.
It's by definition insider trading. If they made the trades in public the market price would change to reflect the demand. They don't want that to happen, they want the trade to happen at a non-market price set by people with information about the deal.
No, "I am XYZ hedge fund and I want to buy stock ABC" is not material non-public information to XYZ hedge fund. If it was, any buying or selling of stocks would always be illegal, since you would be "insider trading" on your desire to buy the stock.
All the article says is that people are doing things we don't know about, but implies that somehow we should feel not-okay about this.
I don't know what's going on in my neighbor's house either, and it could certainly be bad stuff, but that's doesn't mean that it is bad or that I should start spying on them.