Comment by kasey_junk | Hacker News Reader

Comment by kasey_junk | Hacker News Reader

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Well just to clarify a little. There are 2 different concepts that sound sort of similar.

1) A dark pool. This is just another name for an exchange, but one that is not public. I don't know if NYSE runs one, but it wouldn't be surprising. The theory behind these is that they are provided as a service to large institutional investors to trade with each others outside the vagaries of the public markets for lots of reasons (mostly advertised as a way to not impact prices). The reality of these has been mixed at best. You have to opt into using a dark pool.

2) Payment for order flow. In this case your broker (not the exchange) has an agreement with a third party to sell your trades to them so that they can either trade with you directly or route the trade to an exchange. The reason they want to do this is that the aggregate of all the trades they are buying is not price opinionated (as opposed to hedge funds say) so the market maker can make the aggregate difference between all of them. This mechanism is largely how all discount brokers offer cheap or free trading, so it is likely a huge boon to you. A couple of things to note about this, your broker has to disclose it to you, I believe you are still required to get the NBBO price, & I believe you are required to be able to opt out by directing your order to be directly routed.

[edit] To clarify your question `jsprogrammer `tptacek is referencing #2 above. The reason the technical oddities & violations at NYSE don't have a huge impact on a retail investor is that unless otherwise stated, they are interacting with a wholesale market maker before their order hits any exchange, in a deal worked out with your broker and governed by legal obligations on both their parts.

1)

A U.S. equities exchange has to be registered with and approved by the SEC. There are currently 12 of them. As a registered exchange you have to play by certain rules, and in exchange your displayed top of of book is subject to the order protection rule, meaning that no other venues (exchanges, dark pools, ECNs, or broker dealers) are allowed to trade through your top of book quote without first routing an order to you for the full amount of the displayed size. Exchanges also get a share of SIP revenue (which is important to exchange economics).

In it's most technical definition, a dark pool is an ATS (specifically not an exchange) that has no displayed quote i.e. no market data whatsoever. Most ATSs in the US fit this definition, though there are also ATSs that display a quote. For example, IEX is an ATS that has feed for their top of book quote... so technically not a "dark" pool.

NYSE doesn't run a dark pool and it would be weird if they did. Most US equity exchanges support fully hidden (completely non-displayed) orders, so if you want to trade in the "dark" on NYSE you can just send a hidden order. I think this is one area where futures exchanges and equity exchanges differ. In futures you have icebergs but not fully hidden.

2)

Wholesalers aren't allowed to give you a worse fill than the NBBO. That's the law. Often they will actually give you a tiny bit better than the NBBO on marketable orders. I think they do this so retail brokers can advertise price improvement. For most of the low cost retail platforms there is no ability to direct your order. You give it to the broker and I think basically if it's a marketable order they send it to the wholesaler and if not they post it to an exchange that offers a liquidity adding rebate (the brokerage keeps the rebate, natch). If you are willing to spend a little more on your brokerage account, you can use a platform like Interactive Brokers which does let you route orders directly.

How does priority work on fully hidden orders? Are they always at the back of the line?

Thanks for the clarification on the NBBO ramifications on wholesalers. I have never worked on a order flow trade and would love to see an insider account of them (its sort of what I was hoping Flash Boys would be about).

Yeah for a given price, fully hidden and the non-displayed portion of iceberg orders will be ranked (generally by time priority) behind any displayed shares. Most of the rules are meant to incentivize displayed size.

Non-displayed orders and the non-displayed portion of iceberg orders are generally put in the back of the line behind all displayed liquidity. There are some exceptions, such as the BATS "hide not slide" order.

The case we are talking about however, I believe, is where NYSE operates an apparently public market with delayed quotes for some players. Tptacek claims that my orders cannot even make it into the supposedly public market because someone will scoop up my order on the way, before it even reaches the delayed quote market and therefore, the market is not special because I cannot access it (which is disputable).

Yes: if you, as an individual, place an order at an online brokerage, your order is most probably not going to make it to an exchange. It would be stupid to send it there, because wholesalers will give you better prices.

This is the case for retail orders, but not for trading firms. Prop trading firms don't tend to route their orders through wholesalers; they have deals with execution platforms (or implement their own) and route their orders to exchanges.

But there's a whole 'nother set of reasons why we're not especially concerned about competitions between prop trading firms on speed/latency/whatever: if they're impacted by HFT at all, they're competing in a zero-sum game to arb prices, and there's no moral reason why a slower trading firm is entitled to some equitable share of all the available profit from some arbitrage strategy.

Tptacek seems quite convinced that the "tiny spread" pocketed by HFT arbitrageurs comes entirely out of the pocket of competing HFT shops and has no impact on the prices paid by other participants.

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