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Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market Paperback – June 25, 2013
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"Far more comprehensive and persuasive [than even Michael Lewis' Flashboys]."
--James Stewart, New York Times Book Review
"An excellent history of the early electronic traders" - Michael Lewis
“Scott Patterson’s Dark Pools is about the most important financial issue no one talks about—how high-frequency traders have rigged the market.”
“Remarkable…even long-time participants in electronic markets will learn a lot from this book.”
“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.”
“An engaging narrative…DARK POOLS is easily the most entertaining and accessible book to cover the new world of stock trading.”
“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.”
“Very enjoyable….a good story of how innovators destroy the old guard.”
“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.”
“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.”
“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 financial regulation from the nation's capital.
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- how some HFTs rig systems to get to the front of the line ahead of other traders,
- how prices get systematically manipulated, often crossing over boundaries of legality,
- how this system has produced a very risky situation for the entire securities and financial markets.
His descriptions of the mathematical and software mechanisms of HFT and adjacent transactions are not very sophisticated, but that does not take much away from a fascinating and powerful portrayal of the downward ethical spiral on Wall Street. We need to wake up as a nation (and world, as much of this is mimicked in countries other than the U.S.A.), and change the system towards a fairer and more stable structure.
Even for someone with a background in finance, Dark Pools is a fascinating account. Scott Patterson manages to paint interesting portraits of the early pioneers of computer network trading (the so called SOES bandits) and the evolution of the trading networks. There's a very interesting portrait of Josh Levine, who wrote the software for the Island trading network. I have a book of essays by Haim Bodek on HFT. However, I didn't know his history in HFT until I read about it in Dark Pools.
I was also impressed that Patterson got people at Renaissance Technology to talk to him at all, although he doesn't have a much better picture of how Renaissance trades than anyone else.
The only fault that I can find with Dark Pools is that Scott Patterson does not understand software. He has an annoying habit of referring to any complex trading software as Artificial Intelligence (AI) software. Back in the 1960s AI got a bad reputation so very few people refer to complex decision making algorithms as AI. And in many cases the software that Patterson refers to would not be classified as under the old definition AI (although some of the learning algorithms might be).
But software is not the strong point of this book: computer trading networks are and Patterson does a good job describing these and how HFT evolved.
Greed took over as a way to make money through high frequency trading. Ironically, there was a race to the bottom with faster and faster trades that rely on smaller and smaller margins. The real losers are the millions of people that relied on investing for their retirements. With more than 50% of the trades being executed by the HFT, what would have been compounded growth to build a retirement nest egg is going into the fastest traders with the best game plans.
If you read Flash Boys, this is a great book to augment the picture of HST.
Wall Street: The place where our 401ks and pension funds go, which we should all probably understand better than we actually do. Despite what could be called, at best, amateur interests in the world of trading, I couldn't put this book down. While by no means a deep technical work, Dark Pools still proved highly educational, offering a lot of insight into the inner workings of today's stock market. Fortunately, Patterson presents the material in a way that's eminently accessible, even for those without a Wall Street Journal subscription. Discovering not just how the market is, but how it came into its current form, was eye opening.
Dark Pools isn't just about the markets, however. It's also a testament to the raw power of computing and its ability to change the way we work in just a few years time. I expected the book to cover some hyper-modern trends like high frequency trading. What I didn't anticipate was a beautiful and inspirational story about a few gifted individuals employing computers to revolutionize the world of finance. As it turns out, one 20-something young man working out of a tiny office near Wall Street actually built large portions of the high tech stock market we see around us today. Ever the idealist, he sought to beat the hordes of greedy and self-serving market makers at their own game, using little more than a closet full of computers and his brain. And in many ways, he succeeded. But the story doesn't end there; this new technology would eventually take on a life of its own, growing and evolving at fantastic pace. Millions and billions would be made and lost in seconds. And it's still going on, all around us. Some say it's out of control.
I thoroughly recommend Dark Pools to anyone with even a passing interest in the stock market or the development of technology. It's an eye-opener on the state of our national finances on one hand, and a testament to the power of man and machine on the other.