42 pages • 1 hour readMichael Lewis
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Dark pools are private exchanges, often run by large Wall Street firms, that allow those firms to match the buyers and sellers of stocks outside of public view, although they report all transactions after the fact as required by law. One of the many problems with dark pools is that they follow a predictable sequence, first completing a partial order within the pool and then completing it on a public exchange. The extremely brief moment between those two sequences allows high frequency traders to swoop in and poach orders at favorable prices before reselling them. Dark pools embody The Culture of the Stock Market by existing in the liminal space between legal technicality and moral ambiguity and by their dual role as an exploitative measure themselves and a potential weakness to be exploited.
High Frequency Trading is a general term for a type of stock trading that uses computers to execute more orders at a volume and speed far beyond what was possible under the classic system of human-to-human trading. High frequency trading often exploits loopholes in algorithm-based price updates within the milliseconds that it takes signals to travel from one exchange database to another. Complex computer algorithms give high frequency traders a competitive advantage over other traders, which they utilized to gain a dominant role on Wall Street by the early 2010s.
By Michael Lewis