Wall Street’s ‘Private Rooms’
bloomberg.com
bloomberg.com
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)
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.
Is there evidence for this, or this all baseless speculation?
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.
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.
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.
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).
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.
All the article says is that people are doing things we don't know about, but implies that somehow we should feel not-okay about this.
I don't know what's going on in my neighbor's house either, and it could certainly be bad stuff, but that's doesn't mean that it is bad or that I should start spying on them.
> Insider trading—the practice of buying or selling a company's securities based on material, nonpublic information—has long been a contentious issue in financial markets.
https://www.investopedia.com/terms/i/insidertrading.asp
There's also a question of whether they are good for the health of the overall market: https://www.cbsnews.com/news/finances-dark-pools-explained/
No, it doesn't. All trades are made public after they happen, as per regulations. There is no difference to insider trading regulations if a bad actor trades via a lit exchange or via a dark pool. Dark pools only "hide" pre-trade information, such as standing buy or sell limit orders.
Probably trying to get away from HFT if I were going to guess blindly.
Also potentially tax evasion?
EDIT: The rules also dictate the allowed prices the dark pools trade at. They have to be within the national BBO, they can't just trade at whatever price they want. So the public auction is actually helping them find the prices, without their pre-trade information affecting the price before execution.
So if I have a RTX 4090 to sell (a very sought after commodity these days), and I sell it to my buddy rather than listing it on ebay, I'm doing market "manipulation"?
Same as "10 per store" limits when PS5s or whatever are in short supply, but then the CEO calls up the warehouse to get one for every student in their kid's class.
I can easily see the retail price of a good, I can go to a wholesaler or some other holder of this good and ask them if I can buy it at a cheaper price. They might tell me to kick rocks if I don't have volume. Pretty similar to a dark pool. Markets are both private and public everywhere.
In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
But traders can easily hide the size of their "true" order by breaking it up into chunks and constantly refilling the order if it's taken? This is basically trading 101. If you want to do a big selloff, you're not going to dump all of that in one order.
it kinda works out because the other side is also smart and will also break up their orders. Putting in a massive buy order is a good way to pay through the nose.
Isn't that how everything is traded? Am I supposed to be outraged that everything I buy retail also exists in a wholesale market?
I don't see how I'd be disadvantaged as any actor in that scene.
It sounds like I'm asking for a pony in this scenario. I shouldn't expect to get that.
If I want to buy at $5 and hold it for more than a day, I don't think the secrecy of that big sale really affects me. It'll be over soon enough.
It does, it means that you could've gotten the stock for maybe $4.9 instead of $5.
If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.
Except that the market is all game theory. If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.
I design some financial software and the best way to think about it is to abstract away the idea of money and numbers. Think of it as a maze and every stock and price point combination is a doorway.
Normally a door, when you open it, you can see down the hallway to how long the next door is without actually entering the hallway. (In the stock market this is called Level II data) the impact of dark pools is that when you open a door you can't see how long it is. Except that it looks like every other hallway with a defined length, but you don't know that it is a hallway that keeps going for an undetermined amount of time. There's no way to figure out the length without entering the hallway and going as far as you can until you either reach the end or become exhausted (Not a great way to solve a maze).
Without access to the dark pool the best you can do is enter the hallway and figure out it doesn't behave as expected and move away from it.
It's a significant advantage when you are playing against other people to see the complete picture of the maze at any given time. There are entire teams of PhDs working to decode the positions of dark pools they don't have access to by analyzing option data.
Your basic argument there seems is "new information can cause the price to move at random". And I accept that. But it doesn't matter to anyone on the lit market because the trades on the dark market would help or hinder them at random if they were publicised. If there isn't a systemic bias then it is just noise, I have a choice between the price on the lit market or ... the price on the lit market plus some random variable that might be positive or negative. It doesn't change how much money I expect to make. I'm not at any sort of disadvantage.
It doesn't change my ability to value my trades and it doesn't cause me to think I'm going to be better or worse off. We already know that distinct market participants have different knowledge and world models. There isn't anything here that it is useful to adjust.
> Think of it as a maze and every stock and price point combination is a doorway.
This explanation literally makes no sense to me; I don't see how it matters. Someone offers to buy at $X/sell at $Y. Someone else chooses to take the other side of the trade or not. It is only that weirdly complex if you want it to be.
If you need omniscient knowledge of the market structure to value a good then it isn't possible to trade it because your knowledge is always lacking information that is relevant to valuations. For example, you can't know about orders that are about to be lodged in the immediate future. We all have to operate with the understanding that some other market participants know things we don't and value things differently. It doesn't make the trading environment unfair.
You seem to have a traders perspective here where you want to turn a turn an asymmetry of nearly irrelevant information into profit. I'm cool with that, but I don't care if it works or not. It sounds like a zero-sum game, someone is going to lose. and I don't see why I should be phased about who or why. I just want the market to offer to buy/sell things at a fair price. Dark pools don't seem to influence that in any way, the incentives mean that the price signalling should be basically honest.
Its similar to complaining that someone is buying eggs at wholesales prices while you are paying retail.
That was the goal and it failed at it in everything but the most technical sense. Why two people coming to a handshake deal about the price of their property is illegal is insane. I previously bought the argument about propensity for fraud. But if we’re normalising crypto, there is zero need to continue treating stock like it’s radioactive.
I mean, that's literally what happens with trading cards. It's super common to base face-to-face deals (whether for cash or trades) on internet pricing, including very big ones. (the trading card market is a lot less liquid, though, so it's also common for there to be a fairly big discount or premium on those prices in the deal for various reasons)
Massive public investments and global finance could result in you and your neighbor losing your jobs and houses, and cost you a lot of tax dollars rescuing them. It's happened multiple times. That's why they need to be regulated.
Or, you know, sometimes people do business behind closed doors because day to day operations aren’t useful in many scenarios.
Of course small trades aren't relevant, but big ones should be visible.
The information about someone _wanting_ to buy or sell a large amount, is hidden via the dark pool, so that this order doesn't make the public markets move.
To a point. The benefits of millisecond-grain transparency really stretches my credulity.
Let people trade. Make them report it in a reasonable period. The folks who need millisecond granularity will find it. Most economic activity doesn’t need that, and while the liquidity is good, again, I’m not convinced it needs to be publicly disseminated in the way it is now.
Insider trading is illegal because it undermines faith in the fairness of the public market. If insider trading is legal, then market actions by insiders are almost guaranteed to result in the action being a poor deal for the other side. Either the insider is buying shares because they have strong confidence that the price is about to skyrocket (i.e. prior to the announcement of a massive sales deal), in which case the prior holder lost out when they would have preferred to hold; or the insider is selling shares because they have strong confidence that the price is about to crater (i.e. announcing very poor results), in which case the person purchasing the share probably would have preferred not to buy at that price. The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result. When companies are privately held, buying and selling shares without insider knowledge (i.e. deals being conditional on due diligence) is much less common, so it's really only a concern for public markets.
Public markets absolutely depend on regulators enforcing that information asymmetry is kept to the absolute minimum possible, so that the market will be perceived as fair, so that people will continue to participate.
Finance noob question here: has this actually happened?
And related, don't non-pro traders basically always lose money on trades but still exist?
(I've been genuinely unsure why insider trading by non-decisionmakers is banned, always seemed like it would result in more accurate prices)
by the same token, gamblers also on average lose money, but still exist.
Rather, the theft is from the market participant who is getting the raw end of the deal. Legal trades require consent. If you sell someone a hard disk that you know crashed and is unusable, under the guise that it is working, you committed fraud. If you sell someone a new car that it turns out is going to break down almost immediately, you are subject to lemon laws and must refund or replace the car. If you had sex with someone in a case where consent was not in place, including in cases where the sex was pleasurable but the other person was defrauded to who you were (i.e. not their long-time partner), that is rape. And if you take stock that you're pretty confident is going to lose 80% of its value in three days when poor earnings will be announced, and offload it to an unsuspecting victim, no I don't think you can make the case that there is genuine consent here.
I am convinced that they only added this bit to make sure people would argue about skin color and ignore the implications of the rich making sure the peasants aren't allowed to play the same game as them.
Source: work in industry.
This would turn "investments" into investments again... you really believe that company XY will do something good? Buy stocks and keep them for few years until they grow. Politican John Bobson dumps his stock of ZX company? Well, now we know before they actually get dumped, and can sell our stocks too.
Buying stocks of a company for 1.7 seconds and selling them back is not an 'investment' by any kind of proper definition.
Millions of people will be doing it, irregardless if it’s banned or not.
The best thing you can do is let it happen, monitor it and call out bad actors.
It does make it much more expensive, and something that people with other options won't want to be involved in. If 'dark room' trading was illegal, Goldman, etc. would exit those markets.
It's true that people break laws, but the extreme idea that laws and law enforcement are therefore useless is obviously wrong. Look, for example, at the Republicans and their allies banning DEI - it's had quite an effect.
I'm not sure what value you are getting out of the second paragraph. If some politician dumps a ton of stock X and I go "oh no, I'd better get out of that as well", won't I still be in line behind not only the politician but also everybody who has bots that automatically act on his actions within nanoseconds? It gives you warning that a stock is about to crater, but there's nothing you can do about it without giving someone the power to jump the line, and power like that can only be abused.
Can you elaborate why those bans will improve the market and what the issues are with HFTs in your eyes?
There are other reasons as well, but these venues essentially exist to solve some very niche problems for institutional trading. Public filings are available for review in case you're interested in the rules of each dark pool. [0]
[0](https://www.sec.gov/about/divisions-offices/division-trading...)
This sounds like a pitch written by a Wall Street lobbyist trying to go back to the minimum-tick days. (Holding large orders is just pure profit for arb firms.)
They were fined 800k I think?
I believe dark pools started growing post flashboys when people realising what hft meant and wanted an escape (see comment below). But as they got big they became a target in and of themselves (ecology in action I guess).
I worked in algo trading at the time (not hft, but anti hft)
i don't know who you're talking to but no, it's not that criminal. it may be "corrupt" in the sense of rent-seeking or recapture-heavy institutions. it may be "corrupt" in the sense that your average IB analyst knows he's pulling long hours to churn out reams of 80% BS. it may be "corrupt" in that the VP at a PE fund knows that 7 turns of leverage and an inflated multiple for this middle-market shitco isn't actually a good buy. but there are a lot of honest people, enough that you can choose to do business with the same.
seniormost execs exist to be the people who are responsible. They get the big bucks because they're supposed to be accountable for everything that goes on under their watch.
If they don't want the liability, or can't actually supervise sufficiently to prevent crime, then they shouldn't accept the job. If they want to take the paychecks and golden parachutes, they can also take the prison sentences.
do you know how many managing directors JPMC has? this is just one bank and we're talking about a very senior position, half-a-million-a-year base salary sort of seinor. they have around 1,600. it is impossible for one person to manually oversee even what's a pretty high-level position with many direct and indirect reports. impossible to manage this without trusting subordinates.
it sounds like you are motivated more by schadenfreude or malice towards these people because of "paychecks and golden parachutes". this isn't a good-faith position or a reasonable policy.
The fact that, under this mechanism, one can quite literally choose the skin-color of the counterparty trader, under the banner of "diversity" and "similarly minded"-ness, is quite fascinating regardless of politics or morality.
The degree to which market players are going to make market signals to not have the correct meaning is amazing. Dark pools, chopping up buys and sells and strategically rerouting them--all meant to make the market as bad of an information source as possible.
In retrospect, it seems obvious that they would do this. If the market is the best source of information, you can't beat the market, because you'll never knew more than it will.
Will these lead to another London Whale? Time will tell.
There must be some point where this becomes self defeating though, no?
This is some of the data I'm looking at. NVDA price on a particular day vs. average position of trades in bid ask spread aggregated over 10 seconds, on all the exchanges it is being traded on. When it is close to 1, it is trading at close to the NBBO ask; when it is close to 0, it is trading at close to the NBBO bid.
One of the things I found is that the dark pool trades predict price action very well on a few-minute time horizon. "FINRA Alternative Display Facility" on the 2nd plot from the top is all the darkpool trades. If I had access to dark pool trade data in real time I think I could piggyback off the manipulators and make bank.
Unfortunately the SEC only requires them to report transactions within 15 minutes, not in real time.
Yeah, just have lunch with a few of the insiders. That's the issue and will always be the issue.
I'm of the opinion that a huge amount of manipulation happens and the SEC either turns a blind eye to it or the SEC goes after easier fish that have worse lawyers to get their income.
But what would be the penalty if you are caught? A few hundred million dollar fine? Absolute peanuts to any of the firms operating these pools. Of course there is corruption in the system, it is set up to facilitate corruption. Without corruption there would be little reason for these to even exist.
You can trade on these yourself - the darkpool operators are always looking for new market makers. All you need to do is agree to quote a few hundred US equities in decent size inside the NBBO, six and a half hours a day, and you too can have access to this flow.
TRF reports must happen within 10 seconds or be submitted with a late modifier [0]. An executing broker systematically submitting all reports 15 minutes late would be investigated pretty quickly.
You can buy access to the consolidated tape from a marketdata provider, although this is going to be pretty prohibitively expensive for an individual.
[0] https://www.finra.org/rules-guidance/rulebooks/finra-rules/6...
From the customer service bot:
"Yes, other trades are generally reported faster than dark pool trades on our WebSocket. We stream market data in real-time as we receive it, with most trades being reported very quickly. For US stocks, the average latency for trades and quotes is less than 20ms.
However, dark pool trades can be reported with a delay. FINRA allows up to 15 minutes for reporting trades from dark pools. This means that while most trades come through almost instantly, dark pool trades might have a longer reporting time."
I'm not sure what market data provider provides dark pool trades in real time?
As an aside, the behavior you’re seeing might actually be causal- a large print appearing on the tape likely causes automated systems to widen out their quotes. Or alternatively, if the trade is through the NBBO, you’re seeing the top of the book (the protected quote) being swept in compliance with RegNMS.
[0] https://www.finra.org/investors/insights/can-you-swim-dark-p...
- I really don't think they have the best talents in the world. The last place I'd want to work is a finance company. That's true of most AI/ML engineers I know. Therefore I think the best AI/ML talent is outside, not inside.
- HFT and speed isn't the game I'm playing. HFT firms that trade with FPGAs colocated with the exchange are also cursed by their own working business model and they aren't usually interested in minute-scale AI/ML trades
- Not counting speed, I can get most of their data, you can just pay for it. You just need to work out whether you can make more $ than the cost of the data. I suspect it's possible.
- Being backed by a mountain of capital means you take less risks, and you hedge volatility to please your clients, often at higher prices than efficient. Nobody would $100 million would risk 20% of it to make 100% gains. I'm happy to risk 20% of my net worth to double my money though. Big difference
- The market is filled with price action traders that amplify volatility in surprisingly predictable ways. Markets drift quite predictably to Trump policies over hours, not milliseconds. It doesn't take an idiot to realize that markets are headed down if he announces more tariffs.
- I suspect there are lots of $1000-per-trade opportunities in corners of the market that the big players do not take because they go after bigger fish, and increasing the volume on those trades would result in moving the prices and the strategy not working. For me though, $1000 a day is meaningful. That's enough to replace a dayjob.
Do companies themselves know who owns their shares (including those done in private rooms)?
If the answer is no to either or both of the above, doesn't that create all sorts of ownership problems? As an analogy, I'm imagining a country where there is no reliable municipal property registry, and no one knows who owns a particular house. Wouldn't that create chaos?
That's basically how it works in many (most?) US states. There's no authoritative record of all claims on a property. Land registries exist, but they're not authoritative. Liens can exist without being registered on it, and surface later. Hence the need for "title insurance".
https://www.bitsaboutmoney.com/archive/working-title-insuran...
The Consolidated Audit Trail (CAT) is the primary location for this data as it relates to equities. https://www.finra.org/rules-guidance/key-topics/consolidated...
The settlement cycle also dictates the frequency of reporting for many investment instruments. https://www.finra.org/investors/insights/understanding-settl...
To an extent these will always exist - but what we define as investigative journalism will likely decide whether we hear about these at all haha.