Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market [Kindle Edition]

Scott Patterson (Author)

Book Description

A news-breaking account of the global stock market's subterranean battles, Dark Pools portrays the rise of the "bots"- artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who've created them.

In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy. Levine created a computerized trading hub named Island where small traders swapped stocks, and over time his invention morphed into a global electronic stock market that sent trillions in capital through a vast jungle of fiber-optic cables.  

By then, the market that Levine had sought to fix had turned upside down, birthing secretive exchanges called dark pools and a new species of trading machines that could think, and that seemed, ominously, to be slipping the control of their human masters.

Dark Pools is the fascinating story of how global markets have been hijacked by trading robots--many so self-directed that humans can't predict what they'll do next.

Editorial Reviews

Review

“Scott Patterson’s Dark Pools is about the most important financial issue no one talks about—how high-frequency traders have rigged the market.”
--Mark Cuban

“Remarkable…even long-time participants in electronic markets will learn a lot from this book.”
--Forbes
 
“Richly reported…an invaluable piece of timely journalism that should be read by regulators and anyone with a cent in the stock market...You will never look at the opening bell in the same way.”
--Financial Times

“An engaging narrative…DARK POOLS is easily the most entertaining and accessible book to cover the new world of stock trading.”
--Fortune
 
“An education in how markets work, packaged in a thriller worthy of Michael Crichton…. Dark Pools is one of those rare books that is a great summer beach read and a useful trading manual.”
--Minyanville.com
 
“Very enjoyable….a good story of how innovators destroy the old guard.”
--BusinessInsider.com
 
“Dark Pools relays an epic tangle of hacktivists, old-school floor exchanges and traders – all wrestling to game the machines…The stories engage from chapter to chapter, bringing the reader from the outside in.”
--Seeking Alpha

“An entertaining account of the key battles in the “algo wars” and the colorful math geeks who fight them—some of whom are now fighting to rein in the monsters they created. Dark Pools is an alarming account.”
--Canadian Business

“Dark Pools is a must read for all serious investors.  Patterson’s methodically researched book exposes the core problems in today’s securities market…His findings should serve as a blueprint for the SEC.”
--Blair Hull, founder of Hull Trading and Ketchum Trading 

From the Hardcover edition.

About the Author

SCOTT PATTERSON is a staff reporter at the Wall Street Journal, covering government regulation from the nation's capital.

See all Editorial Reviews

Product Details

• File Size: 2362 KB
• Print Length: 370 pages
• Page Numbers Source ISBN: 0307887170
• Publisher: Crown Business (June 12, 2012)
• Sold by: Random House Digital, Inc.
• Language: English
• ASIN: B006OFHLG6
• Text-to-Speech: Enabled
• X-Ray: Not Enabled
• Lending: Not Enabled
• Amazon Best Sellers Rank: #37,983 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
  • #63 in Books > Business & Investing > Investing > Stocks
  • #89 in Kindle Store > Kindle eBooks > Business & Investing > Investing

Most Helpful Customer Reviews

43 of 52 people found the following review helpful

5.0 out of 5 stars better than the other HFT books June 15, 2012

By Daniel

Format:Hardcover|Amazon Verified Purchase

This book does 2 things:
(1) goes through the historical events that led to our modern stock market and
(2) tries to explain what is going on in market microstructure.

The book does very well on (1) -- it's really an enjoyable book to read. But on (2) there's almost no information, no analytic discussion about microstructure, and some of the comparisons and conclusions are simply wrong. For example, the Patterson compares the immediate liquidity with the days of the past comparing the top of the book orders and noticing that today you have fewer orders at the top of the book. But this is misleading. In the past when the spread was at least 25 cents (due to regulation, ie, in increments on 1/8ths, but also in part of the gentleman's agreement between specialists to keep the spreads large) and now the spread is mostly 1 cent for most stocks. To compare apples to apples you need to sum up the liquidity on 25 levels in the current market, because basically these 25 levels would have been aggregated into 1 level in the past. Once you do this comparison, it's clear that the order book today has much more immediate liquidity.

In spite of the title, another thing that's missing in the book is a discussion of dark pools. Obviously, there's a much bigger problem with dark pools today than with the lit market, mainly because the dark pools can legally do prop trading (and they do) on the flow they see, but in the same time they are marketing a hidden market. This is simply wrong and should have been discussed.

The author points out that the market is unfair, in the sense knowledge of market micro-structure gives some players an advantage. But the market was never fair. For example, players with knowledge about a stock have an advantage, even if that knowledge is public. The same with micro-structure. The rules of the micro-structure are published. Anybody can read the order types for the exchanges and the information is public. In the past it wasn't the case (specialists had privileges) In today's market the differentiation is more about technical competence and less about specialists born with entitlements. Moreover, the transaction costs for investors are 1-2 orders of magnitude lower than during the time of the specialists. (I've never seen a single study that claims otherwise) In other words, it'd be unfair to draw Kasparov in a chess tournament, but at least you start with the same pieces (which was not the case during the rule of the specialists)

The author also doesn't compare the state of the stock market with our other markets: futures (futures is much cleaner), FX (dirty business, where banks have a separate inter market with tighter spreads for themselves, plus the broken will do prop trades against you) and OTC contracts, say corporate bonds (huge 1% spreads, little liquidity, the bank will own you). In other words the stock market is the most fair, except maybe for futures (1 exchange, no fragmentation, no complicated rules, latency less of an issue), and way more fair than FX and OTC. The few big banks that own the OTC business have a lot to gain from HFT bashing, as they really don't want their business on a lit exchange.

I only give 5 stars because it's an enjoyable book to read and does a good job at (1). Patterson is an outsider, but he did a good job at (1) that it reads like a novel. There are a few competing books about HFT for the average reader and all of them are worse than Pattersen's book:

1. "All About High-Frequency" (Durbin) - written by an insider, does reveal a little about market microstructure, but a very introductory book. Readable by anybody.
2. "Speed Traders" (Perez) - a book which was quickly assembled as a series of interviews, and Mr Perez is using the book to make a name for himself as a consultant for HFT. (his name is constantly on PR wire and he organizes all sorts of events)
3. "Broken Markets" (Arnuk, Saluzzi) - full of factual lies, written by old school specialists that use smarts to trade, which are bitter for losing business with the modernization of the exchanges, and want the fat 25 cents spreads back.

For the technically inclined that want to learn about market microstructure, there are a few more quantitative book, but they are all dry and not much fun to read.

61 of 78 people found the following review helpful

5.0 out of 5 stars Must Read June 12, 2012

By Brad Katsuyama

Format:Hardcover

As an insider in the world of electronic trading, I thought Scott Patterson did a great job in turning a highly complex subject into an easy-to-read and compelling narrative. As investor confidence continues to wane, it will further fuel the already heated discussion on the fairness of the market for every day investors. He didn't hit all the major conflicts that are present in the electronic trading industry, but those will hopefully make for a good sequel to his book. After reading thousands of pieces on the topic of market structure, this book stands out among the very best. Most literature on the subject falls into the trap of being too academic (and falling short of explaining the true nuances of market structure) or too biased (from both the HFT and anti-HFT camps).

In anticipation of those who will be critical of the author for missing some key pieces of information or misrepresenting a particular subject, readers need to realize that this is an industry that is shrouded in intense secrecy. Those who have intimate knowledge of this subject are rarely willing to talk about it, and many firms go to great lengths to protect their secrets and immense profits. As a "non-insider," it is impressive how the author was able to link together pieces of the puzzle, and thorough research was evident in his writings.

To take a quote from the author's previous book, The Quants: "The market was like a coin with a small flaw that makes it slightly more likely to come up heads than tails (or tails than heads). Out of a hundred flips, it was likely to come up heads fifty-two times, rather than fifty. The key to success was discovering those hidden flaws, as many as possible. The law of large numbers that [Ed] Thorp had used to beat the dealer and then earn a fortune on Wall Street dictated that such flaws, exploited in hundreds if not thousands of securities, could yield vast riches."

By using math, science, and computers to detect slight imperfections in the market, people made fortunes, but in many ways this type of arbitrage was fair. Those who studied the coin in great detail had a better chance of predicting the outcome of the coin flip.

But has the pendulum swung too far?

This book is a good first step towards transparency, bringing to light many subjects that would never be presented to the average reader. When evaluating the fairness of today's market, and as you read through Dark Pools, the most important question to consider is: What if some coin producers are *purposely* making imperfect coins?

47 of 60 people found the following review helpful

3.0 out of 5 stars Two Separate Books June 27, 2012

By Josh Kalish

Format:Kindle Edition|Amazon Verified Purchase

This is really two separate books in one. The first is a bit hyperbollic, silly, and scare mongering account of the dangers of high frequency trading. The second book is a fantastic and engaging account of the evolution on the US equity trading marketplace.

Just some examples of #1:
At one point the author claims that HFT has lead to the lack of liquidity in smaller cap stocks including the slowdown of IPOs.
He quotes a consultant saying that a financial instituion will loose billions because of a loop in HFT code.
The reader is repeatedly scared of a looming and undefined "catastrophy" becase of HFT.
The improvements in spreads and liquidity is relatively ignored. Just go back and look at some old TAQ data to see how bad the markets used to be.
The author tries to paint a picture of one large order in the marketplace that is getting ripped off by HFT. The reality is much more complex with many orders of all sizes and time frames working throughout the day.

But, despite the silliness above, this is the best account of the evolution of the US market that I have seen. I'm sure many of the people considering buying this book have looked at ITCH and OUCH specs. But in the book I leared that it was all one guy, the original Island developer who developed them. And he named them ITCH and OUCH just to poke fun at NASDAQ's naming conventions.

There are so many more, great, stories that most readers will still enjoy the book. Take the history and the personalities and ignore the analysis.

More About the Author

Scott Patterson is author of the New York Times best-selling book The Quants and a staff reporter for The Wall Street Journal, where he writes about the government's regulation of the financial industry. His work has also appeared in the New York Times, Rolling Stone and Mother Earth News. He has a masters of arts degree from James Madison University. He lives in Alexandria, Virginia.