ArsTechnica explains the world of high frequency trading
Supercomputers pitted against one another in a high-stakes battle of attack and counterattack over a global network where predatory algorithms trawl the information stream, competing every millisecond to gain an informational advantage over rivals. It sounds like Hollywood fiction, but it’s just an average trading day on the stock market.
And you don’t stand a chance against them either. Not only does such trading hugely dominate the market, they get preferential treatment, early notification on trades about to happen, and just by their size, can move prices.
The article delves into what for most of us is arcana, iceberging, predatory algos, statistical arbitrageurs, and dark pools.
Dark pools, then, let traders completely sidestep normal stock and commodities exchanges in order to buy and sell assets without having to broadcast their desired price to the rest of the world.
Thus, they are not beholden to the trading rules the rest of us must operate under. If capitalism is supposed to be all about open and free markets, then dark pools clearly have nothing to do with capitalism and instead are just another way a tiny elite siphons money from the rest of us, seemingly above rules and the law.
Worse, such trading can clearly lead to market meltdowns.
On Black Monday (10/19/1987), all of the portfolio insurance programs started dumping assets in lock-step, in response to a particular set of inputs. This synchronized selling begat more synchronized selling, and by the time this giant, market-sized feedback loop was shut down by the closing bell, the Dow had lost almost 23 percent of its value in a single day.
The computerized trading systems of 1987 were slow-moving toys compared to what we have now.