How Dark Pools and Machine Traders Are Rigging the U.S. Stock Market
Dark pools are private trading venues that allow investors to buy and sell stocks anonymously, without revealing their identities or intentions to the public market. They are supposed to provide liquidity and lower trading costs, but they also create opportunities for manipulation and abuse by high-frequency traders (HFTs), who use sophisticated algorithms and super-fast computers to exploit tiny price differences and information gaps.
In his book Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market, Scott Patterson exposes how HFTs have gained an unfair advantage over ordinary investors and how they have contributed to the erosion of trust and transparency in the financial system. He reveals how HFTs use dark pools to hide their trades, front-run orders, trigger flash crashes, and engage in predatory practices that harm both individual and institutional investors.
Patterson also traces the history and evolution of dark pools and HFTs, from their origins in the 1980s to their current dominance in the market. He interviews insiders, whistleblowers, regulators, and critics who offer their perspectives on the benefits and risks of dark pools and HFTs. He also explores the potential solutions and reforms that could restore fairness and stability to the market.
Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market is a gripping and eye-opening account of how technology and greed have transformed the stock market into a rigged game that favors the few at the expense of the many. It is a must-read for anyone who wants to understand how the market works and how to protect themselves from its hidden dangers.
One of the main characters in Patterson's book is Brad Katsuyama, a former trader at the Royal Bank of Canada who discovered how HFTs were manipulating the market and decided to fight back. He founded IEX, a new exchange that aims to provide a fair and transparent platform for investors, free from the influence of HFTs. IEX uses a speed bump, a 350-microsecond delay, to prevent HFTs from reacting faster than human traders and gaining an edge.
Another character is Haim Bodek, a former HFT who blew the whistle on how some exchanges were giving preferential treatment to certain HFTs by allowing them to access hidden order types that gave them an advantage over other traders. Bodek's revelations sparked investigations by the Securities and Exchange Commission (SEC) and lawsuits by investors who claimed they were cheated by the exchanges and HFTs.
Patterson also examines the role of regulators and lawmakers in overseeing and reforming the market. He criticizes the SEC for being slow and ineffective in addressing the problems caused by dark pools and HFTs. He also questions the wisdom of the Regulation National Market System (Reg NMS), a set of rules adopted by the SEC in 2005 that aimed to create a more efficient and competitive market, but inadvertently paved the way for the rise of dark pools and HFTs. aa16f39245