I happened to have a set of standing instructions for a number of technology companies which consisted of buying stock when it dropped more than 5% below the 90 moving average, and selling stock when it exceeded more than 5% the 90 day moving average.

For a lot of tech companies this was basically a money pump since they rose and fell quite cyclically. Then I went to work at one of the companies on my list (NetApp) and one quarter EMC announced they were going to miss their earnings and all storage companies dropped. Two weeks later NetApp announced their earnings which were better than expected.

When I got my brokerage statement for the month I had a nice gain because they had bought NetApp on the dip, and then when the earnings were announced the stock went up so they sold the shares that had been bought. About three weeks after that I got a call from the SEC. I referred them to my broker which showed both the standing order, and that they had been in place for a couple of years before that event, and the SEC went away. However I did take NetApp out of the mix because, well it is always unnerving when your phone tells you the SEC is calling. :-).

She worked for the company handling Sun's employee purchase plan and stock option plans. I've stuck with her as she he moved from company to company (generally by acquisition). Establishing a standing order was simply a matter of calling her up and telling her what I wanted to do. I'm not sure how it was implemented on her side though.

Have you considered using IBKR to do the same sort of automated order execution, but without the AUM fees?

Everyone is different of course, I'm not a min/maxer trying to eek every cent out of my investments. My goals are/were around not having to work if I don't feel like it. I do understand people who use their net worth as some sort of 'score' they feel they need to 'win.' That is not who I am.

[1] I basically consider a zero fee robo-investment strategy in specific ETFs as the 'null hypothesis' here. If the team out performs that, it is okay, if they don't we need to talk.

My old man always taught me: People love to brag about their wins (in the stock market), but rarely share their losses. The best traders know: You learn the most from your losses.

If this strategy is so good, why don't you run a prop trading firm doing exactly this? And do you run the same strategy for oil, natural gas, soybeans, and pork belly futures?

"If your strategy in trading microelectronics stock (largely hype-based and that you have an intuitive understanding of) is so good even though you didn't actually claim it as being all that, why don't you run the same strategy in trading pork (no one has ever gotten hyped about pork)?"

Every time I post about how I'm bad as something or made a mistake, then learned a lesson, it is followed by a bunch of humble braggers telling stories-of-convenience about how they avoided such an "obvious" mistake.

Finally, let me share yet another of my lifetime fails: During 2008/2009, I was convinced everyone was wrong about risk management at huge investment banks -- subprime mortgages and synthetic CDO^2! I was thought they were infallible, filled with financial maths geniuses would could navigate any financial storm. I was dead wrong. I was shocked when Goldman's legendary Global Alpha fund CLOSED after massive losses. Could. not. believe. it. It's still a bit shocking to write, because their record of outperforming the S&P 500 using partner money was the stuff of legend. And, yes, I lost so much money against Bear, Stearns & Co. and Lehman Brothers. Ouch!

I dunno. Too many variables to dismiss as horrible out of hand. For one, it depends on the actual companies involved.

Also depends on exactly how he executed it. If the stocks followed the typical average of 10% YoY gains as the rest of the market, then there's a way to execute this strategy wherein he wouldn't lose by definition. For instance, he might set a mark on the sell side to ensure he's not selling at a loss vs. his last buy.

Now, he might get stuck holding the stock for some time (especially after a big downturn) and that might incur him some opportunity cost. But, that wouldn't mean a net loss if he was willing to wait. And, that'd be no different a risk than, say, a typical buy and hold strategy.

"Buying tech stocks" is probably the lucky bit. If the stocks are cyclic but there is a upward trend it probably works pretty well.

You are correct, to an extent.

It breaks when the stocks in question continue to go down. I happen to be a really conservative investor (I tend buy and hold, never got into the whole day trading thing during the dot com rush). Given that each 'up' blip was essentially a 10% gain on my investment (approximately) the cash gain would be banked[1] when it sold and there was a 20% stop loss[2] sale as well. But with a very cyclical stocks the returns were pretty steady.

I added the stop loss after I found myself holding stock that just became more and more worthless after the dot com crash. (when you buy on the dip and the dip keeps right on going :-). It is also the reason I had Agilent stock for a while in that I was holding HP stock when they spun off Agilent, the HP sold when it continued to tank and there were no instructions on the Agilent. So between 1990 and 2005 when I had this in place I think the annual rate of return on that part of my portfolio was about 8%? The crash wiped out a lot of gains that took a while to undo (I think if I had sold off what I was holding in 2001 it would have been like 2% annualized gain over the 10 years.

Note, I have never been, nor aspired to be, an "elite" trader. It was in 1990 when I had about $1500 in my brokerage account that was just sitting there in cash and I wanted to something more interesting with it than put it into a bank CD. Hence my foray into "algorithmic" trading :-).

[1] That cash was taken out of the pool, it wouldn't be re-invested on the next dip.

[2] Stop loss -- a 'good til cancelled order to sell a stock at the market price if it's price falls below a set value.

Twenty years ago, I used to closely read articles like ... <<<Miller's Legg Mason Fund Beats S&P 500 for 15th Year in a Row>>> Before I understood more about "finding alpha", I assumed you could find an active manager as a retail investor that could beat S&P 500. With age & experience, I no longer believe it true. Legg Mason beat the S&P 500 for a long, long time... but if you look closely, they only beat by a little bit. Then one year they got crushed and gave back all their winnings and trailed S&P 500. Plus you paid active management fees for 20 years. In the end, investors didn't beat S&P 500 over the long term.

It was crushing for me when I put all the pieces together. For so long, I believed I could outsmart the market as a retail trader by finding the right active manager. After that, I never looked back -- 100% ultra low cost passive index trackers against WIDE, well-established indexes, so I'm not "stock picking" by another name.

In 2001 that stock was trading for $0.83/share[1]. And while I didn't have any opportunity to sell it, being an employee and all, what really pissed me off was that I had Sun stock that I could sell that would have been worth $360,000 after taxes (which would have paid off my mortgage). Instead I rode that stock down to about $9000 when Oracle bought them.

Similarly my 401k savings account, that I had put in the max amount every year for decades, had under-performed the S&P500 and even some lousy mutual funds.

So yes, I've had my share of ups and downs, and yes if I had put all of the money I ever had in my brokerage account into an SPX ETF I might have more in it now than I do.

But here is the thing for me, and perhaps spending my teen years in Las Vegas warped my perception of money enough to make this possible, I recognize that the equities market is essentially "random" and various studies have born that understanding out in the large view. As a result it doesn't "feel" to me like I somehow lost money through my own actions, it feels like the bet I made didn't pay off. That is a different approach than getting emotionally invested in the financial outcome of investment decisions. When I came to understand that I was not going to spend all of my time reading financial reports and resumes of senior management like my Dad's ex-swiss banker friend does to get an "edge" I had two choices, go the ETF route or let my financial manager manage some of my assets.

[1] At $0.83 that was about $40,000 in the restricted stock (nobody exercises their incentive stock options that are underwater :-), And yes, I recognize that $40,000 is way better than nothing, and because of my 83b election I have a long term capital gains loss that I can claim for $3,000 a year on my tax return every year and that will continue for the next 75+ years if I were to live that long (I won't).

It’s a classic “picking up nickles in front of a steam roller” strategy. But it could work for a really long time. Until it doesn’t.

This! I see so many "options trading strategies" for retail traders that are exactly this.

Some commodities have exactly the right kind of volatility and timing for these sort of trades.

They should have removed all orders the day they became an employee.

I know high frequency trading firms that are heavily inconvenienced by insider knowledge. They have to shut down so many things. Securities Insider trading is really tricky in the US as it isn't a specific law specifically about insider trading, only a bunch of court cases by the securities regulators that they sometimes won.

Normally, HFT firms don't care about insider trading. They are trading "noise" -- finding signals from past and present trading activity to make small bets that are 51% likely to be successful. They manage risk very carefully. This is not a secret. Cliff Asness from AQR Capital has given multiple long-form interviews on this topic. You can Google to find podcasts and printed articles.

On the other hand, long-short hedge funds, such as Steven Cohen's legendary Point72, love insider information! It is the backbone of their business model. The best ones employ an onion-like defense strategy to launder inside information as legitimate analyst reports. Only the outermost layer is directly transacting in insider information. As the information moves closer to the center -- real traders -- it is carefully masked to hide its origin. The SEC was never able to catch Steven Cohen, but they caught many, many people around him and eventually forced his original fund to close.

If a firm - that also has an agnostic active trading strategy - gets any inside info they have to cut the active trading strategy for liability reasons. That’s a conclusion some firms have made, not whether the SEC will actually bother them in a quantum reality or whether they can successfully defend it.

That said, RenTech was under intense scrutiny by SEC and IRS for their incredibly aggressive tax strategy. I did not follow it to the end.

First: Yes, Medallion fund is the primary fund of RenTech.

Second: To me, stat-arb can be HFT or non-HFT. They were/are doing HFT stat-arb in Medallion fund. AQR, Virtu, and Citadel are probably doing both HFT and non-HFT stat-arb. Twenty years ago stat-arb was called "pairs trading". Today, it is much more complex: basket vs basket.

Did you have any legal obligation to do that. What would have happened if you choose to remain silent?

I think the SEC could have probably made a case that it was possible for me to know that NetApp's results were going to be better than the street expected (I didn't know that but I did know we weren't hurting like EMC was). And the money involved was small. I expect it was the timing more than the amount that triggered their call.

I was surprised I didn't hear from NetApp's general counsel at the time (I'm sure they were notified).

So if I said nothing? That would probably trigger a closer inspection. Sure its my right to not speak to them, but doing so would have probably made them more suspicious. And frankly, I have seen so many times when people trying to be "tricky" got into more trouble than if they had just been open with what was what that I have rarely felt tempted to push back on that sort of thing.

This is selection bias. The people who get CAUGHT doing it are complete idiots.

and/or greedy.

Even if you're "smart" about it, you can only hit so many lottery tickets before you come under suspicion.

I'd bet the best way to get away with insider trading is to do it once, make under $1 million, then walk the hell away and never speak of it.

Also, she was convicted for LYING about insider trading.

She lied repeatedly to investigators saying among other things that it was a pre-arranged trade. The person that tipped her off admitted everything though.

She went to jail for lying to investigators, obstructing justice, etc. And still had to pay a $195,000 civil fine for the insider trading!!

Source: https://biography.yourdictionary.com/articles/why-did-martha...

18 U.S. Code § 1001 - Statements or entries generally

https://www.law.cornell.edu/uscode/text/18/1001

The lie is a felony but only when connected to a federal matter. [2] [3] [4]

[1] This used to mean (many moons ago) something of very high quality. However, as our government became ever more like what is _now_ our government, the idiom took on the opposite meaning: good enough to say it's done, so we can move on from it. It's also used to say when something is correct for the discussion but not in the broader sense. Source? My neighbor the FBI agent told me, and I've heard it in action many times since then.

[2] https://www.pagepate.com/experience/criminal-defense/federal...

[3] https://www.justice.gov/archives/jm/criminal-resource-manual...

[4] https://www.mololamken.com/knowledge-Is-It-a-Crime-To-Lie-to...

The SEC and the IRS are police.

Obligatory repost: https://www.youtube.com/watch?v=d-7o9xYp7eE&t=612s

Pretty much anyone could spot insider trading patterns. I’d be willing to bet these guys were making bets only on Netflix in the form of short-dated options most of which typically expire worthless. If someone were to repeatedly aggressively buy low probability short-dated options around an event like earnings and win consistently you would be able to infer that they are trading on insider knowledge.

Of course recognizing the pattern is only half the battle. They also have to figure out how they are accessing the inside info, hence tracing the traders back to Netflix employees and conversations they had regarding paybacks, etc.

Even if you lost money the one time you did it, I'd probably still recommend doing it approximately once.

That's not rational, of course, but humans aren't rational.

Besides, unless you're already wealthy it's harder to hide the theft of huge sums of money.

If you are very rich they dont throw you in jail.

I used to know a Wall Street guy sometime around 2005. The way he presented it was that there is a ton of variations of insider trading going on. People talk to each other and insiders are always ahead of the general investors.

I tend to believe that. As creative , greedy, competitive and smart these people are I can’t imagine them not taking advantage of every opportunity they see. Also, in most other industries the regulators mostly go after the smaller guys because the big guys are too hard and expensive to prosecute.

To elaborate - use someone who gets their hands dirty gathering info then communicates their certainty in code and in person.

[0] "STOCK Act - Wikipedia" https://en.m.wikipedia.org/wiki/STOCK_Act

There are a lot more sophisticated methods of insider trading. Just for starters, get someone else who has no apparent insider status to make the trades for you. It doesn't take a genius to come up with strategies like burying your insider trades in a much larger number of regular trades to make the profits less conspicuous, or getting fake blog posts written that essentially say to do exactly what the inside trader is planning to do thus creating a plausible explanation besides insider knowledge for an agents strategy.

It's like money laundering: the methods you see on TV are the simple versions that are easy for an audience to understand, they're not what people who have actually taken the time to come up with a strategy do.

Just being on FTX probably makes it much harder for the SEC to find the gains, though.

they already do that. sometimes the info is passed through many ppl and still get caught.

Exactly this. Especially in the 21st century world of big data, ML algorithms and all that jazz.

The closer you are to the action, the higher the chances of getting caught.

If you work for a finance firm, its pretty much guaranteed you'll be caught. Firms are hot on it and they take all sorts of layered measures to prevent it and stamp it out. If you work for a finance firm, in most cases its actually harder to obtain the insider information in the first place than it is to act on it as a PA trade. One of the most well funded and well-staffed departments in any finance firm is the compliance department and they have the power to kill your career instantly (you'll get escorted from the office the moment they suspect anything, forced to stay at home on gardening leave whilst they investigate and then once that's over - and assuming it doesn't go legal - you'll find nobody in finance will employ someone who was sacked for compliance reasons).

If you work for a listed company, then like these guys eventually found out, you'll be caught. A bit of data mining at the SEC will soon weed out transactions made by people who likely knew what was going on before the public did.

All this hard work on compliance makes the stockmarket one of the most even playing fields there is for investors, because the work of the SEC and other regulators around the world is there to ensure John Doe has the same chances as Warren Buffet to make money on the stockmarket. (Yes, the world of HFT is a bit different with their technological edge, but that's another story).

Compliance is a cost center. The Redditesque fantasy of compliance departments overflowing with resources because the company loves law for the sake of law or thinks that going above and beyond makes you less likely to get screwed than just doing what your lawyers tell you the laws says you need to do are just that, fantasy.

Compliance departments get tasked with making the company comply, nothing more, nothing less. And they're mostly given the resources to do that, nothing more nothing less.

For a start "company loves law for the sake of law". The company is operating in (a) a highly regulated environment (b) likely wishes to avoid the fines and adverse publicity associated with non-compliance. Its nothing to do with "loving the law".

But each to their own interpretation I guess.

I don't disagree in principal but...

I called the behavior Redditesque for a reason. Comments portraying regulatory agencies as all-seeing gods ready to smite anyone who dares not display their faith enthusiastically enough let alone materially violate the rules are wildly popular there. Cynical realpolitik takes (e.g. "MHSA will show up and fine you for everything they can while doing nothing to materially improve safety") on regulatory enforcement are very much unaccepted over there. Millennials and gen Z, exactly the people you'd expect to be the most cynical are also over-represented there compared to the general population. So clearly there's some other mechanism at play.

When Warren Buffet bought financial stocks in 2008-2009 the deals were done in such a way he could not lose money easily, or at least had a much lower chance than any ordinary investor.

Isn't one of his great sayings "be greedy when others are fearful" ?

IIRC the market didn't have much lower to go in 2008-2009 so if he bought at (or close enough) to "the bottom" then he wasn't really taking on much risk anyway.

Did it myself last year when COVID started and the market plummeted. Went on a shopping spree with some spare cash I had, lots of decent shares being effectively sold at a discount, all you had to do was "be greedy when others were fearful" ... pick something up at a 20%+ discount and then just sit and wait (and be prepared to wait a few months to a year). And with COVID it was pretty clear that as long as it wasn't an airline or hospitality stock, the odds would be in your favour.

There is some mythology here that is out of tune with the reality of using your power to get favorable deals.

Most places I know of would not only have the sort of induction training you imply, but regular refreshers for anyone involved in regulated or at-risk activities.

Also, what about dark pools?

Contrary to my username, which I just get a kick out of, I don't actually work on wall street or anything, but I've always felt the stock market was rigged for the elite. I think it is very likely that they have info before normal retail investors have any idea.

Flash Boys: A Wall Street Revolt by Michael Lewis painted HFT in a pretty bad way. I have read criticisms of the book, but it's hard to separate out bias from the criticism.

There's also all the heat on Robinhood about selling order flow, which I'm surprised was even news to regular investors. It's great they eliminated fees for normal trades, and I also understand most major brokerages sell order flow as well (and still charged for trades for a long time). I read that Fidelity is the only major player that doesn't sell order flow.

Do you have some sources that someone could learn more about this, ones that don't have a vested interest in painting it in a positive way?

Also, I'm still wondering, considering dark pools [1], and the inside information that would come along with that, since those trades wouldn't hit public markets, how the stock markets can be considered a fair place to trade?

[1] https://www.investopedia.com/articles/markets/050614/introdu...

I suppose it depends on how you define ridiculous, but HFTs actually make a surprisingly small amount of money these days. Probably single digit billions across the entire industry (https://quant.stackexchange.com/questions/34856/how-much-pro...), though 2020 was an exceptional year for many firms.

> Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place?

Either your wording is a little funny, or this question indicates great ignorance about how trading works. Exchanges do not provide liquidity, market makers do. In 2021, "HFT" ~= "market maker".

I'm a software engineer, interested in crypto, and not that involved in traditional markets (except for holding an S&P 500 index fund).

I do think the exchanges in traditional finance shouldn't have required HFTs in the first place (i.e. it's an antiquated technology). I also think hedge funds and the ultra rich have privileged info, that retail investors don't have.

Anyway, I appreciate the clarification. I like learning about all this.

As you learn more about crypto and traditional finance, it'll be fun to compare the two. Your confusion about the role of an exchange in traditional finance might be because you see the crypto world, where a single entity often performs the roles that many entities perform in traditional finance (exchange, clearing firm, broker, etc.).

> I do think the exchanges in traditional finance shouldn't have required HFTs in the first place (i.e. it's an antiquated technology)

I'm not quite sure what this means, but it's important to understand that HFTs exist in the crypto space as well. Capital markets don't function particularly well without marker makers, and absent some rule explicitly preventing high speed trading, marker makers will tend towards being the fastest traders in any market.

Yes, I agree!

In terms of what I called antiquated technology, I think there are a lot of layers on traditional finance, and a lot has changed since its beginnings. I think crypto will go through a similar evolution, in terms of tech, regulation, etc. I think we're in the very early stages for crypto and it has a chance to be an even better system.

I do know that HFTs exist in crypto, and it still is the wild west in some ways, but in the end I like that innovation is happening and that there are alternatives to existing systems.

That said, I appreciate all the responses and I'll take some time to learn more about traditional markets.

There’s just not

a. Enough random interested parties willing to buy/sell various coins so that you have low-spread and liquid markets

b. Non-hft players who keep crypto markets in line with each other

This isn’t super surprising. Managing posted liquidity is a difficult task that sort of requires being halfway to a market maker, and naturally most non-market makers just want to buy and sell right away instead of posting orders and waiting/hoping.

The result of this is that most liquidity is provided by HFTs, since they’re the only party that can and even wants to have a bunch of bids/offers out for you to trade against.

Just like cutting inches off mainframe cables, manufacturers of ASICs purpose-build computer chips for crypto. GPU operators tune their cards and even download new code to get every last bit of processing capability from their devices. Crypto in these ways is just like HFT.

Transferring data and calculating the core of a new block takes a fraction of a second, and then it takes an average of several minutes to find the right random numbers to finish the block.

A latency advantage in HFT lets you take most of the profits. A latency advantage in cryptocurrency mining gives you a fraction of a percent better profits.

A calculations-per-second advantage helps in mining, but it's strictly proportional.

No.

> Transferring data and calculating the core of a new block takes a fraction of a second, and then it takes an average of several minutes to find the right random numbers to finish the block.

A PoW, say Bitcoin, is configured in the consensus algorithm to avoid duplicate spending. The fastest, correct miner for a block that communicates the quickest to the network will get the block.

There's near-zero overlap between the numbers tested by different miners. So a latency advantage does not make you win. Everyone is picking lottery numbers in parallel. If three miners have the exact same hash rate, and one of them has a 2 second head start, then the one with the head start is only going to win 33.4% of the time.

If I'm misinterpreting you, feel free to clarify, but to me it looks like you're saying that latency matters (more than a fraction of a percent) with cryptocurrency, and it does not matter.

And moreso, "the fastest decision-making computer with the shortest time to the network makes the block." is not true. Even if you mean "lucky" by "fastest", since the computer that finds a block doesn't have to be fast, 99+% of the time blocks are found far enough apart that time to network is irrelevant.

I highly recommend this book though if your into this topic

Apologies if my post implied insider knowledge on the part of HFTs. That's not the case.

The point I was making is their model is ONLY viable if they have the best mathematical brains, the best computing power, the best connectivity. If anything in that fragile chain is broken then their model is unviable.

In the end, they trade on what is best described as noise. They look for patterns in the noise. And so they need "the best" noise, as soon as instantly as they can get it, and the computing power to process it as close to instantly as possible.

I called it "another story" because its a truly nuts way of making money. ;-)

There is an old saying. "Time in a trade is better than timing a trade". HFTs are basically trying to do the latter all day, every day.

In my view, John Doe the buy & hold investor actually has the advantage that they can wait for weeks, months or years.

Tortoise & Hare and all that ....

Being able to send an order with a smaller latency does not magically get you a "better price".

99.9999% of the market participants couldn't care less if their orders arrived 1ms or 1m after they send it. Hell, most hedge funds trade on a _daily_ basis, with multiple days of expected returns predictions, and are more concerned with the transaction cost than the latency, thus opting for a very slow "market close price" execution algo.

Those interested with very low latency are not hedge funds but market makers, and the kind of microstructure signals they exploit is not only orthogonal to what a retail investor would do, but often brings in just bips per trade, meaning the leverage required to make it worth it is anyway out of the retail league.

> I think it is very likely that they have info before normal retail investors have any idea.

What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc.

But normal retail investors don't trade on events, they trade for the long term. For the simple reason that they don't want to hit refresh every second on the web page publishing earnings calls of each stock they want to buy.

> what about dark pools?

Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange.

> Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place?

What does that even mean? The exchanges don't offer price by themselves, they just reflect what participants are willing to pay or receive. They are just middlemen facilitating the exchange of goods by publishing the order book of who's willing to buy/sell and at which price.

The exchanges also cannot magically provide liquidity out of thin air. Liquidity means there is someone real on the other end of your trade that is willing to buy or sell to you. Exchanges cannot create that artificially.

What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.

Thanks for clarifying.

> What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc.

Well, this is sort of what I'm saying. As a regular person, you just don't have the same information, or the ability to act on it as quickly. Sure, buy and hold investors aren't really affected, but they are providing liquidity for these folks who can take some advantage. I may be pretty wrong about this, however, it's just like anything where there are friends / contacts / associates. Some parties just have more information, especially if they have money to spend. You did mention earnings though. I just have a hard time believing that hedge funds only act on public information. They might structure their trades based on how not to get flagged, but how do they not have friends or contacts in the space that tell them a thing or two? This is what they are doing full time, so I would imagine they spend a good majority of their time thinking about how to make the most money and not raise any red flags. I actually don't have an issue with this, but I always see claims that the traditional market is totally fair, but it does not seem like a very flat system to me. Those in power seem to have some advantage. If that was how the market was presented (i.e. some people have sway, more information, and the ability to act more quickly than retail), I wouldn't have any issue with this. I see the opposite though, the narrative is that retail traders can make trades without worrying because it's totally equal. If all retail traders were doing was buy and hold, then again, no issue, but not all retail traders trade that way.

> Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange.

Where do I learn more about dark pools? My initial response to learning about them was that they are basically tailored to hide trades from the general public, for the benefit of institutional traders. I was concerned that dark pool operators would also have information that then they could front-run the rest of the market with. I feel like when I make a trade in the equity markets, or if I read something in traditional news, someone else has heard about this earlier that day, or maybe days before, based on insider information, just due to them being more deeply involved with the market. I just don't really see how this is fair (and this is the claim I see time and time again in traditional markets). I don't think all this information is public. If it's in some obscure place, that 95% of the investing public doesn't see, is it really public? Maybe the SEC protects against that, but it seems like the big players have an advantage. It seems like I have a lot of incorrect assumptions though, so I'd like to learn more about this.

> What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.

Yeah, I get it, this is a quite mature market (and that's a good thing). I still have a feeling that the extremely powerful have sway in the market, in a way that isn't exactly "fair", but maybe it just comes down to the amount of capital they have (but again, I would think that the size of the trades should be on public markets then, not dark pools). Anyway, in the end, what I've learned from all this is how far the traditional markets have come, and how other markets (like crypto, which also have things like dark pools) can learn from this.

Well the general idea is that everyone have the possibility of getting the information at the same time. The difference is how fast you can react, which seems fair to me.

To be frank, hedge funds, especially quantitative ones, are usually not the fastest to respond to earnings. The lifecycle of earnings announcements often roughly goes like that:

- Company X releases its earnings on the SEC website. This usually happens once the market is closed (~6pm) so that people have until the next morning to digest it, and avoid dubious ultra fast reactions. The publication date was already announced so everyone know it's coming.

- The next morning at market open, some (few) investors already place trades based on the earnings published. Most of the time, these are human decisions made by financial analysts experts on company X that read the earnings, because systematic funds seldomly trade on unstructured data such as PDF reports.

- an earnings calls takes place the next morning also, so that financial analysts can ask questions and clarifications about the figures to company X. Right after, the wav/mp3 of the call is uploaded (often on the company website). Some more investor do trade based on the earnings call, either by financial analysts listening to it, but more and more just by reading the transcripts. Some (few) hedge funds apply NLP to parse the transcripts at that point, and trade based on the results.

- The next day, major data providers (think Reuters/Refinitiv, Bloomberg, etc) have processed the transcripts to structured data. The major hedge funds all subscribe to these data providers, and are now able to start trading on the earnings event.

- The same day, Bloomberg releases an article about the earnings of company X and explains why its good, dedicated retail investors and non systematic hedge funds get interested and join the trade.

- for the next 10 days or so, more and more (slower) people will continue the trend on these earnings, until the price stabilizes to a market consensus. See PEAD - post earnings announcement drift - for more information.

This is more or less how it goes for earnings. Nothing strikes me as _unfair_ here. Everyone had the opportunity to put effort in reading the earnings. It's just a trade-off of convenience (i.e. I want structured data), price (i.e. I hire a financial analyst to interpret the earnings early), and R&D (i.e. I invested in NLP to parse transcripts) versus the speed of reaction to the event.

What could make it more fair for retail investors? Forbidding the use of financial analysts because they are more knowledgable than average Joe? Forbidding the use of NLP because average Joe does not know how to code?

> I just have a hard time believing that hedge funds only act on public information.

Oh but trust me they do. Now there will always be outliers, shaddy deals, etc. Any system with rules have cheaters. But that's definitely very very exceptional. This is especially true for non proprietary funds (funds managing money of other people - the vast majority), since the amount of scrutiny is huge.

Allow me to use myself as an example. I work in a hedge fund, though I deal mainly with operational / technical / quantitative matters. I have one of the lowest grade of surveillance level (MIC) which still entails:

- All my work phones are tapped (mobile and fix)

- All my work conversations are logged.

- I am forbidden from contacting anyone about professional or financial matters if the medium is not logged (i.e. No whatsapp, no signal,...)

- I am forbidden to invest in most asset classes. Except for equities, for which I need pre-approval of the trades 2 days in advance, and have a minimum holding period of 30 days. Compliance has access to my brokerage account, and reports on those of my close relatives.

- I am forbidden from giving any financial advice to anyone, even family or friends

- I am forbidden from receiving any financial research or counseling material from anyone, through any medium (mail, phone, conference) if the material is 1) free or 2) undeclared.

- I am forbidden from discussing or meeting with some people in the office, as well as walk in certain parts of it ("Chinese walls") , since screens could reveal information, or conversations could take place.

- At leat 15h of compliance / legal training per year.

- I am personally (not the company: myself) liable up to $10 millions (disclaimer: I don't have that kind of money) if any material incident happens that could be traced by me not setting up the proper mitigation. E. G. If a bug happens and I did not give the team the means to have catched it. Or the worst nightmare of MICs: if someone does some shaddy business, and I did not arrange for enough control or compliance training for him to know that it's illegal.

- The usual set of no paid gifts, trips, conference in fancy hotels or whatsnot.

- etc etc etc

Keep in mind that's not even the highest scrutiny level. So, yes, some people cheat, we see it in newspapers, but that's the 0.0001%

> Where do I learn more about dark pools?

I honestly don't know. This is really a detail of equity markets, each broker have a different one with different specificities. As for front running, this is IMHO something of the past (at least on equities, for major brokers). Clients are well aware of the risk and require huge amounts of compliance and processes on their brokers to prevent that, not even mentioning the regulators themselves. The reputation risk is just not worth it.

> My initial response to learning about them was that they are basically tailored to hide trades from the general public

Well that's true. But it's often because the purchase is too huge to be made public, it would disrupt the market for no reason. Think of what happens to crypto when a whale sells off, huge upswing followed by huge downswing, until the price settles back again,and in the meantime the investor got an awful slippage, people panicked, bit trade crazy stuff, etc.

I know dark pools trigger the imagination of journalists and retail, but there's really nothing fancy about them. Let's take a real world example to explain how they are used.

Every year, Apple reserves a portion of their profits to buy back some shares from the market, which they then destroy (I won't enter into the details of why they do that, it's a pretty common practice for growth companies). Apple does this every quarter, it amounts in 2021 to $20 billions of share buyback per quarter (~$80 billions last year). What would happen if Apple just goes on the market and places a fat $20 billion market order? It would be total chaos. With such a big order, the whole liquidity of the book would disappear, price would skyrocket, people shorting apple would receive insane margin calls, people long apple would be instant billionaires for a split second, volatility would cramp up and market dislocation would trigger, meaning the stock would have to be halted, trading bots would sell everything, Apple itself would be ruined to buy at such a large price, etc, etc, etc.

That's where the dark pool can be handy. Apple announces publicly the buyback amount and date (this is mandatory for public companies), and in exchange for a (often) slightly less good price, apple can perform its buyback on a dark pool where the price won't move, and nobody will panic.

US Senators would likely disagree with your assessment. [1]

[1] https://unusualwhales.com/i_am_the_senate

Agreed that the people getting caught are dumb. Especially making trades about your ex employer when you’ve already started an insider trading ring.

No not really. Billionaires do it as well and they dont go to jail.

https://en.wikipedia.org/wiki/Steve_Cohen_(businessman)#SEC_...

Not saying that SEC doesn't have sophisticated tools but I think in most cases they don't need that. Their power lies in their regulatory ability to collect personal information of who trades, when and how much.

The SEC can collect all the information it wants, but people committing securities fraud may not provide accurate information.

Trades are back-fitted into some model for plausible deniability, and they also purchase political and legal cover, often at the highest levels. I wouldn't surprised some are just a front for an APT that needs more cash for their black budgets.

They generate a lot of asymmetry, billions upon billions.

Here's some patsies that got caught: https://www.theverge.com/2018/8/22/17716622/sec-business-wir...

I work at a law firm that does public M&A deals and we occasionally get inquiries from the SEC about, e.g., people that went to my high school (but a different class year) who bought stock in a company my firm did work for in the months leading up to the deal. Obviously neither me or the other person ever worked at either company (or even had any connection to them), but they still identify us as a potential risk because I could have potentially obtained insider info through the firm and then passed it on.

SEC vs Welhouse shows how sophisticated people get and yet get caught via data analytics

https://www.sec.gov/litigation/admin/2015/34-75319.pdf

A simple proposal they would quickly grasp is to have insider trading but spread out over two or more companies, let's call them ACME and Weyland-Yutani. They would have the Weyland-Yutani employees make profit off insider info passed from ACME employees, and have ACME employees make profits off insider info passed from employees of Weyland-Yutani. I imagine they would also want to prevent the groups involved from becoming too large.

It might not just be bragging. Arguably it's in society's interest because some people might believe it and be convinced not to try insider trading.

That is what friends are for.

or maybe they underestimate the determination of feds

the govt is very good at tracking this stuff.

Maybe in this pumped up bull market certain individuals have restrained from Insider Trading, but it's alive and well.

In college, I was a errand boy at a finance business in SF. The amount of insider tips I heard was staggering. I would be a rich man today if I had a bit of money back then. (The owner of the business did get close to going to jail, but it was over something else. I believe it was tax evasion. It didn't help he was Ed Meese's Financial Planner at the time.

I live in Marin County. A wealthy enclave that espouses liberal values, but are ruthless when it comes to their money. They share info at Wholefoods, or the charity dinner they get tipsy at. Hell, if I had money, I'd be tempted.

They trade a lot of information.

For years, the SEC was very small, and it's not much bigger today.

Hell, the only real money my dad made in the 90's was from an insider tip over thanksgiving dinner from a father in-law. (My dad passed, and the SOL is long gone.)

Also, the way they do this is by examining trading patterns. The SEC is 100x better at this than most other countries. Insider trading prosecutions are very rare outside the US (not just because it is hard to catch, it is very hard to win insider trading cases at trial). It requires a fairly sophisticated approach to uncover suspicious trades (every day, billions of trades, millions of securities, you have no idea who works where, you have no idea who their family is, you have no idea who their friends are...not easy).