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Wall Street’s ‘Private Rooms’

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Re: Wall Street’s ‘Private Rooms’

#141

Post by solatic »

Nifty3929 wrote: post #10

It is not clear to me what nefarious things people believe are going on there that we should be worried about. 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.

It's insider trading, just with a different class of insiders (i.e. first level of insiders are people associated with the company itself, and the second level of insiders are Wall Street traders with access to non-public pricing signals).

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.

Re: Wall Street’s ‘Private Rooms’

#142

Post by autoexec »

_bin_ wrote: post #81
reverendsteveii wrote: post #19

Earlier quoted context omitted.

The only reaction more adverse than the one you get asking coders about remote voting is the one you get asking finance people about transparency and anticorruption. It's an open secret at this point that any effort that would weed out a significant proportion of the fraud would cripple our finance sector overall just because everyone who runs it would be in prison.

it's more like because governments have started to try to assign criminal liability to seniormost execs, not just to the people responsible. this is a response to the wink-and-nod cases that do exist but glaringly fails to account for the complexity and scope of large financial institutions and the fact that the guy at the top can't always supervise everything personally. i don't know who you're talking to but no, it…

> it's more like because governments have started to try to assign criminal liability to seniormost execs, not just to the people responsible.

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.

Re: Wall Street’s ‘Private Rooms’

#143

Post by exmadscientist »

SR2Z wrote: post #135
throwaway2037 wrote: post #120

Earlier quoted context omitted.

Agree: They are called block trades in equities. Also, another benefit of a dark pool is that you can pay to control who you trade with. On the primary exchange, it is dog-eat-dog. This is why long-only asset managers prefer block trades for supersize trades, and dark pools for smaller trades. To me, the practice of paying for (non-toxic retail) flow is way more suspicious than dark pools. This is how Robin Hood can…

> This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run 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…

Or, to frame what you said in slightly different terms:

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).

Re: Wall Street’s ‘Private Rooms’

#144

Post by goodcanadian »

hibikir wrote: post #108
hayst4ck wrote: post #90

Earlier quoted context omitted.

> won't impact prices 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…

let's assume you are right. Also assume that the two people in the dark room are both somewhat rational investors. Then let's imagine that they are trading at a price that is significantly different than the open price. Why are they both OK with that price? If the price is higher, the buyer could be buying for less in public. If it's lower, the seller is the one that could sell in public for a profit. So one of the t…

If I am not mistaken, the trade still has to be reported after the fact. What they are avoiding is leaking signals about what they want to trade before the trade occurs.

Re: Wall Street’s ‘Private Rooms’

#145

Post by sfn42 »

nairboon wrote: post #136
roenxi wrote: post #132

Earlier quoted context omitted.

^_~ How? Nobody was selling it for $4.90 in that example.

Although the above example was missing some details, I suspected it was meant to illustrate the following effect: The public last price was $5, so bid/ask will be around that price let's say 4.99/5.01, if you buy with a market order you'd pay approximately $5 ($5.01). But if there is a new large sell order for 5 million shares at 5.05, then the market would react to this information and adjust bids & asks. For illust…

Why would lots of shares available at 5.05 cause others to sell shares for 4.90?

Re: Wall Street’s ‘Private Rooms’

#146

Post by Onavo »

whatshisface wrote: post #109
JedMartin wrote: post #98

Earlier quoted context omitted.

It's actually the other way around. As a big fund looking to trade a large number of shares in the public market, you'll quickly realize that the market tends to move away from you, and statistically, you're more likely to get a bad deal than a good one. Even if you try to be smart about execution by splitting your orders into chunks, randomizing order sizes, and similar tactics, there is still a huge information asy…

Instead of demanding that your counterparty be uninformed, why not do a market open/close auction every minute?

Because others may benefit from exploiting your big orders.

Re: Wall Street’s ‘Private Rooms’

#147

Post by JumpCrisscross »

whatshisface wrote: post #109
JedMartin wrote: post #98

Earlier quoted context omitted.

It's actually the other way around. As a big fund looking to trade a large number of shares in the public market, you'll quickly realize that the market tends to move away from you, and statistically, you're more likely to get a bad deal than a good one. Even if you try to be smart about execution by splitting your orders into chunks, randomizing order sizes, and similar tactics, there is still a huge information asy…

Instead of demanding that your counterparty be uninformed, why not do a market open/close auction every minute?

> why not do a market open/close auction every minute?

Reality moves faster. That means whoever can price closer to the auction can incorporate more information.

Re: Wall Street’s ‘Private Rooms’

#148

Post by JumpCrisscross »

ajsnigrutin wrote: post #20

Ban high frequency trading, ban instant transactions (put them on hold for some time before buying/selling (hours minmum, longer for larger quantities), make the held transactions public, and tax the profits on a time-owned scale. 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 Bob…

> Ban high frequency trading, ban instant transactions (put them on hold for some time before buying/selling (hours minmum, longer for larger quantities), make the held transactions public, and tax the profits on a time-owned scale.

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.)

Re: Wall Street’s ‘Private Rooms’

#149

Post by concordDance »

solatic wrote: post #141
Nifty3929 wrote: post #10

It is not clear to me what nefarious things people believe are going on there that we should be worried about. 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.

It's insider trading, just with a different class of insiders (i.e. first level of insiders are people associated with the company itself, and the second level of insiders are Wall Street traders with access to non-public pricing signals). 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 r…

> 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.

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)

Re: Wall Street’s ‘Private Rooms’

#150

Post by cjpearson »

solatic wrote: post #141
Nifty3929 wrote: post #10

It is not clear to me what nefarious things people believe are going on there that we should be worried about. 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.

It's insider trading, just with a different class of insiders (i.e. first level of insiders are people associated with the company itself, and the second level of insiders are Wall Street traders with access to non-public pricing signals). 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 r…

One of Matt Levine's common refrains is "Insider trading is not about fairness, it is about theft." There are always market participants with different levels of information. The problem occurs when you misappropriate confidential information you were entrusted with for personal gain.
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