But the rise of "off-exchange trading" is terrible for the broader market because it reduces price transparency a lot, critics of the system say. The problem is these venues price their transactions off of the published prices on the exchanges - and if those prices lack integrity then "dark pool" pricing will itself be skewed.
Thanks Libertas, I needed a good laugh.
Yeah, the problem is that things will be priced what they are worth on the exchanges! People aren't paying the rigged bubble prices we want them to pay! That could threaten the exchanges!
Damn right it could!
But whether or not high-speed trading is sinister, revenues for these firms have been declining for years: in 2013, they were about $1 billion, after peaking at around $5 billion in 2009, according to estimates by Rosenblatt Securities. If, as Lewis says, these traders are doing nothing more than ripping off the rest of the market, it's a shrinking problem.
And why are they loosing money? Because 40% of the trades aren't using the exchanges. The people they are looting aren't coming in anymore, so you see, so HFT may or may not be a problem! But Dark Markets are! Because their operations will "erode market quality" by allowing prices to find their actual levels instead of the artificial HFT induced levels...
"So much of the U.S. equity order flow is in now in the dark, or siphoned off, that it never hits the lit exchanges, and there is just a lot less in the way of trading opportunities," said Mark Gorton, CEO of high frequency trading firm Tower Research Capital LLC.
In an attempt to win back some of the retail orders, exchanges such as IntercontinentalExchange Group's New York Stock Exchange, Nasdaq OMX Group , and BATS Global Markets, have allowed brokerages to place dark pool-style orders on their platforms, with the trade hidden until after it is executed. NYSE, Nasdaq, and BATS declined to comment.
Translation: Please come back so we can rob you some more. Yes, we will "hide your trade" - no really we will. Would we lie?
The pools were originally created for institutions to trade large blocks of stock without creating a large impact in the market. If an order of 1 million shares was tracked, people on the other side of the trade could quickly jack up prices and the original investor could easily pay more than expected.
But you see, if you trade in a HFT market, all of those retail orders for smaller amounts can be added up and the HFTs can adjust the price in microseconds , to make sure that the prices are jacked up when th small fry buys, and then return lower so they can be sold at a profit to the small frys who are buying them. Gee, why wouldn't you want to use a market where you know the "price discovery" mechanism is manipulated and corrupt? - But yes, those "dark markets" need to be shut down.. and those HFT guys, don't work about them, thier opportunities for corruption and theft are declining.. until we shut down the dark markets..
