I strongly suspect that wall street has looked at 401k's/index funds as a giant money filled piñata. It is a huge pile of money following a well understood algorithm which makes it vulnerable to attack.
I suspect that this is the absolute core of "dark pool" strategy. Any trade that happens behind closed doors that "doesn't impact prices" means that an index fund is buying or selling at a price other than the "real" price meaning that dark pools are functionally a wealth transfer from grandma to an institutional trader.
The purpose of these private rooms is to separate your orders from those players so that you trade against other uninformed parties, making your chances of getting a good or bad deal closer to 50/50.
Reality moves faster. That means whoever can price closer to the auction can incorporate more information.
I suspect this would put everyone on more even footing, with less focus on beating causality and light lag, placing more focus on using the acquired information to make longer-term decisions. This would open things up to anyone with a computer and a disposable income, though it would disappoint anyone in the high-frequency trading field.
Like one share of stock trades each minute in each name? Or one trade randomly executes?
If the former, you stop trading the stock and start trading something pointing at it. If the latter, the rich get to trade.
> less focus on beating causality and light lag
You’d have to ban cancelling orders, otherwise you bid and offer and then cancel at the last minute. Either way, you’d be constantly calculating the “true” price while the market lags and settling economic transactions on that basis. (My guess is the street would settle on a convention for the interauction model price.)
If you’re upset about stock markets looking like casinos, the problem isn’t the fast trading. It’s the transparency. Just don’t report trades until the end of the day.
If you aesthetically don’t like HFT, that’s a tougher problem as the price of the stock points at something tied to reality, and reality runs real time.
Both ideas sort of look like the private markets.
This has the advantage of every trader getting the same price every minute. And racing against the clock has marginal utility
It has the same utility as in the opening cross, the most algorithmically-trafficked moments of trading after the closing cross. The last order can incorporate more information than an earlier one. Given the book is assembled transparently, that means an order submitted close to the deadline can “see” other orders in a way they couldn’t “see” it.
"Blind" meaning that no orders can "see" each other.
Imagine that a company announces the approval of its new vaccine a few milliseconds before the periodic trade occurs. As an HFT firm, you have the technology to enter, cancel, or modify your orders before the periodic auction takes place, while less sophisticated players remain oblivious to what just happened. The same applies to price movements on venues trading the same instrument, its derivatives, or even correlated assets in different parts of the world.
On the other hand, you risk increasing price volatility (especially in cases where there is an imbalance between buyers and sellers during the periodic auction) and making markets less liquid.
> It's a simple technology: 38 miles of coiled cable that incoming orders and messages must traverse before arriving at the exchange’s matching engine. This physical distance results in a 350-microsecond delay, giving the exchange time to take in market data from other venues—which is not delayed—and update prices before executing trades
https://www.fca.org.uk/publications/research/periodic-auctio...
The difference is that in these private rooms, liquidity providers are often able to understand their customer more. For example, big passive index funds aren't buying and selling due to some adverse knowledge of future price movement. Instead, they are merely following the index. If market makers are able to distinguish between the passive indexers and the smart sophisticated hedge funds, they will then be able to provide to the passive indexers at a better price.
Is there evidence for this, or this all baseless speculation?
While I'm not a fan of the "dark pools", if your "grandma" is a buy and hold anyway, the price of the asset should be ballpark correct most of the time since presumably the people doing the trades in the dark room are rational? I suspect that this setup is more useful if you need short term stability in the price to set up a complex deal.
The idea instead is that in a dark room, you can trade large amounts of shares without HFT interference. They'll probably be trading pretty much at the public price, just without sending all kinds of information about the fact that they traded into the world.
2) Those trades are happening at the public price. Its not too often that the dark pool trades will happen outside of the NBBO and usually those exclusions happen for very large block trades.
3) Most (all?) pools are reporting to FINRA by closing some may even report sooner after the trade.
So I am not sure what your question is as the data is fairly public already.
Did prop traders start out-performing index funds? If not, surely said supposition seems somewhat suspect.
This makes no sense. Grandma can only lose money if she sells, most are not actively trading in the market.
Also large trades are in both directions. Some are trying to unload large holdings and some are trying to build large holdings. These pools are merely trying to find other large transactions to be the counterparty, the net effect is to reduce volatility in the open market, which is the whole point: price stability for their transaction.
You are speaking about the index rebalance strategy. Worked well, but does not always work well: https://www.bloomberg.com/news/articles/2025-03-08/millenniu...
(Also, when I spoke of a "reason to think it might be illegal", I had in mind, like, some sort of citation to a law or regulation or decision (or summary of such) that would indicate that, rather than, like, an inference about what the law would have to be in order to make other laws more easily enforceable...)
To me, the practice of paying for (non-toxic retail) flow is way more suspicious than dark pools. This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run it. Unless you have incredibly overreaching regulation and constant monitoring, it is literally a fox in the chicken coop.
This is not true, and front-running trades is both easy to catch and illegal. This is a bad combo for any white-collar crime.
You are correct that they make money by selling non-toxic order flows, but non-toxic here just means that retail investors tend to be "dumb money."
Market-makers need to estimate how much an asset is worth to be able to quickly fulfill orders - they can't instantly find people to take the other side of their users' trades. For example, user A buys Gamestop at $10/share, the brokerage accepts the trade and internally writes an IOU for that share, but later on realizes that the true price of Gamestop is $10.05/share. This means that the brokerage will lose $0.05/share because the price they estimated for the asset was too low. If too many orders from a source are like this, the source is considered toxic because the market-maker will generally lose money on them.
Some types of traders have highly toxic order flows. For example, HFT firms exploit <1ms latency in market makers' price estimates to systematically make money off the differences. Large funds can also place massive orders in a way that moves the entire market to make these estimates wrong.
Retail traders, in contrast, don't reliably know when a stock is mispriced. If Jimmy Bob Joe blows his college fund buying TSLA for $250/share, the exchange can probably give him TSLA at that price and not lose money.
If a market-maker gets too many toxic orders, it has to offer their clients worse prices to compensate for mispricing risk. Worse prices drive customers away, so they will often choose to pay for nontoxic orders to keep that risk down. We, the retail investors, get to trade for free at better prices and the market-makers get to turn a profit.
> it is literally a fox in the chicken coop.
The foxes here are HFT firms, and the chicken coop is any market where you end up trading with them. These "dark pools" benefit the little guys because they exclude the more predatory traders.
Why do people say "the HFTs" are the enemy? I mean, it's kind of true (the mental image I have of HFT firms and hedge funds is of a swarm of locusts descending on anywhere they smell money), but it's missing a super critical piece: there's more than one HFT locust swarm, and they all hate each other. They'd much rather screw each other (more money there!) than screw you (not as much money!) and they're willing to pay you if you can help them do it.
That's what payment for order flow really is: small bribes to send them something useful (non-toxic order flow) which they can then use against each other. Retail traders aren't the ones losing out here (or, if they are missing out, they're paying less than they'd pay under the old commission structure, so who cares).
to be legal, the broker selling your order flow must give the price you're supposed to have gotten to be at or lower than the best price from the market. I dont get how front running could work under this legal rule.
The majority are related to customer protections, lack of data retention etc. With perhaps the violations related to the blue sheet data (transaction data), which is used by various financial regulators to sniff out illicit transactions.
Robinhood's been accused of selling out their retail customer by allowing HFT firms to frontrun retail trade. And yet, no evidence of such actions have been found so far.
Do you understand how front running helps the front runner and hurts the large volume trader? I think if you did, you would realize that Robinhood has no reason to do it.
They do all the communication through a Bloomberg terminal and as far as I now they do no research with the terminal it is just their communication tool.
I'm not sure what all the consternation is about. Even without dark pools you could always do direct trades[1] with a party of your choosing, which is even more private and exclusive. The "private rooms" mentioned in this article just makes this slightly more automated than some trader messaging his buddies on the bloomberg terminal.
[1] https://en.wikipedia.org/wiki/Over-the-counter_(finance)