It's actually the other way around. As a big fund looking to trade a large number of shares in the public market, you'll quickly realize that the market tends to move away from you, and statistically, you're more likely to get a bad deal than a good one. Even if you try to be smart about execution by splitting your orders into chunks, randomizing order sizes, and similar tactics, there is still a huge information asymmetry between you and more sophisticated players. In many cases, they can classify your orders based on different characteristics of your order flow (such as latency profile), distinguishing them from so-called toxic flow from other HFT firms.

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.

Instead of demanding that your counterparty be uninformed, why not do a market open/close auction every minute?

Because others may benefit from exploiting your big orders.

> why not do a market open/close auction every minute?

Reality moves faster. That means whoever can price closer to the auction can incorporate more information.

I think it's an interesting thought experiment. What would happen if the stock market were quantized to a blind one trade per-minute granularity?

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.

> What would happen if the stock market were quantized to a blind one trade per-minute granularity?

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.

He means every minute a single "opening trade" style trade happens and clears overlapping sections of the order book

This has the advantage of every trader getting the same price every minute. And racing against the clock has marginal utility

> 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 one trade per-minute granularity

"Blind" meaning that no orders can "see" each other.

You would change the rules, but I think the result would largely remain the same. As a market participant with the fastest access to data from other markets, news, and similar sources, as well as low order entry latency, you would still be able to profit from information asymmetry.

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.

Attempts at doing this are effectively already existing, the IEX [1] exchange being an example, albeit on a less ambitious scale than your idea:

> 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

IntelligentCross Midpoint (a darkpool) is a better example, since it actually does matching periodically every couple of milliseconds [1]. IEX just introduces additional latency for everyone.

[1] https://www.imperativex.com/products

There are venues that support this. Its called continuous, or periodic, auctions.

https://www.fca.org.uk/publications/research/periodic-auctio...

There are exchanges that already do this and it goes back to the whole attack on HFT even though modern markets have the tightest spreads in history.

This is not exactly how it works. You're right that a big fund executing on a public market will incur (potentially excessive) impact, but the purpose of these private rooms is not to prevent trading against informed parties! Often, the counterparties that a big fund might find on these private rooms will in fact be the same market makers and liquidity providers present on public exchanges.

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.

>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.

Is there evidence for this, or this all baseless speculation?

These kinds of wealth transfers have been studied, and you do not need dark pools for them, just predictable trading patterns. See, e.g., https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5080459 on index funds or https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5122748 on funds that maintain a certain ratio of stocks to bonds (e.g., target-date funds). These costs can be larger than the actual management fees of the funds.

The evidence being asked for is that dark pools and rooms will increase this effect.

It sounds like they didn't read the article. Grandma's money is in a large centralized retirement fund whose managers trade via dark pools, specifically so she won't be grafted by AI traders every time they need to adjust its holdings.

right? How is this different from standard OTC trading?

There are funds that trade on the rebalancing and entrances/exits of individual stocks from the indexes. While this may offer some yield, you can still get pulled under the bus by large scale movement in the markets... as seen recently.

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.

let's assume you are right. Also assume that the two people in the dark room are both somewhat rational investors. Then let's imagine that they are trading at a price that is significantly different than the open price. Why are they both OK with that price? If the price is higher, the buyer could be buying for less in public. If it's lower, the seller is the one that could sell in public for a profit. So one of the two sides is making an obviously bad decision.

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.

If I am not mistaken, the trade still has to be reported after the fact. What they are avoiding is leaking signals about what they want to trade before the trade occurs.

Let's assume you are right. If two parties trade a large amount of shares at the public price, how is HFT going to interfere if the trade took place in public?

1) Dark pools are not as secretive as folks in this thread think they are.

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.

For the record, all large index funds pay a 3rd party to guarantee index rebalance is within X basis points of close. It is reasonably large business for equity portfolio trading desks at investment banks. The margins is pretty damn tight, and the asset manager certainly get better fills than trying to do it themselves on the open market.

> 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.

Did prop traders start out-performing index funds? If not, surely said supposition seems somewhat suspect.

> functionally a wealth transfer from grandma to an institutional trader

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.

I don't really understand what you're saying. The scenario being discussed is that I buy a financial product for a higher price then [hypothetical alternative]. We use the phrase "losing money" in many cases where your financial upside is potentially reduced compared to alternatives. It isn't a "this makes no sense" situation.

>> 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.

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...

Everything you “suspect” is completely wrong