So is it all true what is happening on wall street about dark pools, hft, robinhood selling trade to hft firms…
Are the exchanges of today so unfair???
Have you ever thought as freetrade to give the opportunity to ue this kind of exchanges like iex??
From memory (so please don’t consider these as dictionary definitions):
Dark pools enable institutional investors to trade securities, derivatives, and other financial instruments without using the traditional markets. The idea is that they can secure a sale before the market sees that the sale is being attempted, which would otherwise often cause the price to drop in advance of the sale, which obviously bad for the salesperson. They’re fine in theory but the fact that by design, dark pools aren’t transparent, means that there’s potentially an opportunity for information asymmetry to be exploited. The book alleges that High Frequency Traders one of the ways that were taking advantage of that was by buying stocks that were for sale at a certain price e.g. $100.05, then selling those stocks to someone else in the dark pool who had offered to buy them at a lower price e.g. £100.01, pocketing the $0.04 difference.
According to the book High Frequency Traders more typically try to exploit faster access to the latest market prices in order to make money. They could buy a stock at a certain price which is actually out date but is the ‘best price’ according to an official system that’s slower & has a less up to date price than they do & then sell it to someone who’s placed an order at the new higher price, moments later when the official ‘best price’ is updated. There’s lots more ways that HFTs make money, which the book explains.
The differences in price that the HFTs are exploiting are tiny and don’t really make a difference for retail investors like us but if you’re placing a large order then they matter more. And although the HFTs argue that they’re adding value, the book argues that they’re simply skimming money from investors.
The IEX exchange is designed to stop some of the HTF’s practises. And they had some good news yesterday, they’re just about to list their first stock
As @Freetrade_Team1 says, it’s explained better in Flash Boys that I can manage here.
But an attempt (which might have inaccuracies!)
dark pools: some banks have private stock “exchanges” in which your sell order gets matched up to my buy order and none of it hits the public exchange. The bank might save some money, but you and I don’t necessarily know if we are getting the best price deal. The wider market as a whole doesn’t see the additional pricing information (the information from our trade), which might make it less efficient.
hft = high frequency trading. Because it’s done by algorithms rather than humans, the reaction time to new information is measured in tiny fractions of a second, and the amount of trades is massive. Some big number - a guess: 80% - of all trades on stock markets are hft, so battling algorithms are the market to a large extent. In a way it is more accurate to think of humans as being tiny investing parasites along for the ride
selling trade to hft firms: Citadel pays Robinhood to get your order flow. Your order to buy 1m AAPL arrives at Citadel, their algorithm sees that it will be a large enough order to move the market price up, they put their own order in to buy AAPL before yours, the price goes up when yours goes through, they sell at the new price (or even: sell to you), they make a profit. Repeat every 0.0001 seconds. (Caveat: I might have this one very wrong.)
But remember that their GIAs do not have allowances like ours (£11,700 for capital gains and £2,000 for dividends), only % reductions depending on circumstances (similarly to the UK’s 25% Council Tax reduction for singles).
And their taxes are also generally higher - dividends up to 30% and capital gains up to 39.6% depending on various factors.
Needless to say that their tax systems is about 5000 times more complicated than the UK’s