Introduction Page: 1
About This Book Page: 1
Foolish Assumptions Page: 2
Icons Used in This Book Page: 3
Beyond the Book Page: 3
Where to Go from Here Page: 3
Part I: Getting Started with Dark Pools Page: 4
Chapter 1: Focusing on Dark Pools and High Frequency Trading, Just the Basics Page: 6
Defining Dark Pools: Why They’re an Investment Option Page: 8
Explaining What High Frequency Trading Is Page: 9
Knowing Who’s Involved When Investing in Dark Pools Page: 10
Brokers can make or break you Page: 11
The other important folk Page: 12
Looking at the Order Types Page: 12
Considering the regular order types Page: 12
Eyeing the special order types Page: 13
Regulating the Markets: Legislators Take Action Page: 13
Chapter 2: Taking a Dip into Dark Pools Page: 14
Taking a Snapshot of Dark Pools: What They Are and Aren’t Page: 15
Settled outside the public eye Page: 16
Need for secrecy: Dark versus lit Page: 16
Improving price Page: 17
Examining How Dark Pools Work: Step by Step Page: 18
Weighing the Rewards and the Risks Page: 19
Identifying potential rewards Page: 19
Recognising the risks and preparing for them Page: 20
Investigating Whether Your Trades Are Exchanged in Dark Pools Page: 21
Asking your broker the right questions Page: 21
Sleuthing on your own if you don’t use a broker Page: 22
Making the Best of Your Transactions Page: 22
Chapter 3: Grappling with the Ins and Outs of Securities Markets Page: 23
Figuring Out Pricing: The World of Bids and Offers Page: 25
Grasping how pricing works Page: 26
Looking at opening and closing prices Page: 28
Looking at the highest and lowest prices Page: 28
Making Buying and Selling Easier: Liquidity Page: 29
Market liquidity Page: 30
Off-market liquidity Page: 31
Understanding the Importance of Market Makers Page: 32
Using VWAP and MVWAP Page: 33
Getting to grips with order routing Page: 34
Focusing on price/time priority Page: 35
Eyeing direct market access Page: 35
Part II: Diving into Dark Pool Markets Page: 36
Chapter 4: Introducing Dark Pool Providers Page: 38
Comparing the Different Types of Dark Pool Providers Page: 39
Big-time investments: Block-oriented dark pools Page: 40
No minimum shares required: Streaming liquidity pools Page: 41
Crossing pools Page: 41
Looking at Bank- and Broker-Owned Providers Page: 42
Barclays LX Liquidity Cross Page: 42
CrossFinder Page: 44
Fidelity Capital Markets Page: 45
GETCO/KCG Page: 46
Sigma X Page: 46
ConvergEx Page: 47
Alpha Y Page: 47
DBA/Super X Page: 48
Looking at Exchange-Owned Providers Page: 48
International Securities Exchange (ISE) Page: 49
New York Stock Exchange/Euronext Page: 49
BATS Global Markets Page: 50
Eyeing Some Providers That Have Been Bought Out Page: 51
Chi-X Global Page: 51
Instinet Page: 51
Chapter 5: Meeting the Players and Places Page: 52
Recognising Who the Market Makers Are Page: 53
Heading towards extinction: The human touch Page: 54
Going the automated route Page: 55
Examining the Venue: Where All the Action Takes Place Page: 55
Knowing the venue options Page: 55
Differentiating between stock markets and dark pools Page: 56
Identifying the Cast of Characters Page: 57
Brokers and dealers Page: 58
Private investors Page: 59
Regulators Page: 59
Data centres Page: 61
Journalists, bloggers and writers Page: 61
Academia Page: 62
Automated traders Page: 62
Chapter 6: Regulating Dark Pools Page: 64
Relating to Regulation Page: 66
Defining regulation and legislation Page: 66
Taking action to be more empowered about legislation and regulation Page: 67
Eyeing Regulation of Dark Pools in the United States: Reg NMS Page: 68
Rule 610: The market access rule Page: 69
Rule 611: The order protection rule Page: 70
Rule 612: The sub-penny rule Page: 71
Looking at Europe — the Fastest-Growing Dark Pool Fixture Page: 71
Markets in Financial Instruments Directive Page: 72
Financial transaction tax (FTT) Page: 73
Considering Other Markets Page: 74
Canada Page: 74
Asia Page: 75
Australia Page: 75
Part III: Coming to Grips with Automated Trading Page: 76
Chapter 7: Comprehending Automated Trading Page: 78
Identifying Quantitative Analysts Page: 80
What makes a good quant Page: 80
What quants do Page: 80
Why quants are essential Page: 83
Entering the Realm of the Algorithm Page: 84
Knowing what an algorithm is Page: 84
Building an algorithm Page: 85
Letting an algorithm loose on the markets Page: 88
Chapter 8: Grasping Standard Order Types Page: 92
Identifying the Standard Order Types Page: 94
Comprehending price time priority Page: 94
Gobbling up everything: At-market orders Page: 95
Setting the price on a matching trade: Limit orders Page: 97
Managing risk: Stop orders Page: 99
Identifying Advanced Standard Order Types Page: 100
Hiding behind the full amount: Iceberg orders Page: 101
Wanting it now: Fill or kill orders Page: 103
Executing only a portion: Immediate or cancel orders Page: 104
Chapter 9: Identifying the Special Order Types Page: 104
Getting a Hold of the Basics of Special Order Types Page: 105
Eyeing their characteristics Page: 106
Differentiating between routable and non-routable orders Page: 107
Providing Firms with Rebates: Post-Only Orders Page: 108
Moving to the Next Level: Hide and Not Slide Orders Page: 109
Getting the Best Possible Price: Peg Orders Page: 110
Lining up first: Primary peg orders Page: 111
Buying based on offer price and selling based on bid price: Market peg orders Page: 112
Matching in the middle: Midpoint peg orders Page: 113
Executing Quickly: Intermarket Sweep Orders (ISOs) Page: 114
Chapter 10: Delving into High Frequency Trading Page: 117
Tackling the Definition of High Frequency Trading Page: 119
Eyeing HFT: What it’s all about? Page: 120
Recognising characteristics of high frequency traders Page: 124
Examining what high frequency traders do Page: 126
Predicting the Future of HFT Page: 129
Technology — staying ahead of the times Page: 129
Markets — looking for new venues Page: 130
Legislation – preparing for future regulations Page: 131
Academic study — listening to the whizzes Page: 131
Chapter 11: Understanding Key High Frequency Trading Strategies Page: 132
Scalping for Your Pennies Page: 133
Peering into the world of scalping Page: 134
Identifying what can go wrong with scalping Page: 136
Scalping the automated route Page: 137
Pinging to Gather Valuable Information Page: 138
Identifying what pinging does Page: 139
Examining whether pinging is fair Page: 139
Looking at pinging in action Page: 140
Gaming like a Casino Page: 141
Manipulating quotes Page: 142
Taking advantage of prior knowledge: Front running Page: 144
Part IV: Being Aware of the Risks of Dark Pools Page: 145
Chapter 12: Jockeying Too Much for Position Page: 148
Understanding How Front Running Impacts Your Investments Page: 149
Looking at insider information Page: 150
Having priority access to information Page: 151
Feeding the news data quickly Page: 153
Leaking news Page: 153
Locking up the news Page: 154
Examining Order Cancellations Page: 156
Gathering information Page: 158
Stuffing quotes Page: 158
Playing games Page: 159
Identifying the Impact of Slippage Page: 159
Knowing What You Can Do to Mitigate These Risks Page: 160
Chapter 13: The Ins and Outs of Flash Crashes Page: 162
Grasping How Flash Crashes Happen Page: 163
Blaming the news flow Page: 164
Holding humans responsible Page: 164
Computer programming loops Page: 165
Eyeing How Flash Crashes Spook the Whole Market Page: 166
Flash crashes draining liquidity Page: 167
Going from a lively market to a ghost town: Volume isn’t relevant Page: 167
Examining the Greatest Flash Crash of All Time Page: 168
The perfect storm triggered Page: 168
Theorising about the causes Page: 169
The SEC Speaks: The Official Version of the 2010 Flash Crash Page: 169
Noting the market’s appearance Page: 170
Identifying the participants Page: 172
Tracking the 2010 Flash Crash, Moment by Moment Page: 173
Criticising the SEC’s Report Page: 176
Considering an Alternative Version of the 2010 Crash Page: 176
Finding the exact moment Page: 178
Blaming HFT Page: 178
Analysing a Flash Crash Page: 179
Part V: The Part of Tens Page: 179
Chapter 14: Ten of the Best Dark Pool/HFT Websites Page: 182
Banker’s Umbrella Page: 183
Haim Bodek Page: 184
Themis Trading Page: 184
Scott Patterson Page: 185
Zero Hedge Page: 185
CFA Institute Page: 186
Nanex Page: 186
Able Alpha Page: 187
The Trading Mesh Page: 188
Healthy Markets Page: 188
Chapter 15: Ten Ways to Swim Safely in Dark Pools Page: 189
Watching the Bid Offer Spread Action Page: 191
Checking to See Whether Your Market Order Slips Page: 192
Identifying Changes in the Bid Spread Page: 192
Spotting 100 or 200 Block Orders in the Order Book Page: 193
Checking for Your Limit Number in the Order Book Page: 193
Verifying the Stock’s Spread Page: 194
Recognising Flash Crashes Page: 195
Reading a Tick-by-Tick Chart Page: 195
Talking to Your Broker Page: 196
Perusing the Executed Orders Page: 197
Chapter 16: Ten Common Algorithmic Strategies Page: 197
Market Making Page: 199
Getting Liquidity Rebates Page: 200
Deviating from the Norm with Statistical Arbitrage Page: 201
Catching the Short-term Momentum Page: 202
Employing Latency Arbitrage Page: 202
Following the News Page: 203
Igniting Momentum Page: 203
Combining a Dark Pool and Lit Markets Page: 204
Factoring in the Participation Rate Page: 204
Weighting for Time Page: 205
Chapter 17: Ten Things to Know About Market Microstructure Page: 205
Market Access Speed Page: 207
Order Types Page: 208
Networks Page: 209
Algorithms Page: 209
Fragmentation Page: 210
Order Routing Page: 211
Regulation Page: 211
Transparency Page: 212
Price Formation Page: 212
Market Intermediaries Page: 213
About the Author Page: 227
Cheat Sheet Page: 228
More Dummies Products Page: 228
A plain English guide to high frequency trading and off-exchange trading practices In Dark Pools & High Frequency Trading For Dummies, senior private banker Jukka Vaananen has created an indispensable and friendly guide to what really goes on inside dark pools, what rewards you can reap as an investor and how wider stock markets and pricing may be affected by dark pools. Written with the classic For Dummies style that has become a hallmark of the brand, Vaananen makes this complex material easy to understand with an insider's look into the topic.
The book takes a detailed look at the pros and the cons of trading in dark pools, and how this type of trading differs from more traditional routes. It also examines how dark pools are currently regulated, and how the regulatory landscape may be changing.
- Learn what types of dark pools exist, and how a typical transaction works
- Discover the rules and regulations for dark pools, and some of the downsides to trading
- Explore how dark pools can benefit investors and banks, and who can trade in them
- Recognize the ins and outs of automated and high frequency trading
Because dark pools allow companies to trade stocks anonymously and away from the public exchange, they are not subject to the peaks and troughs of the stock market, and have only recently begun to take off in a big way. Written with investors and finance students in mind, Dark Pools & High Frequency Trading For Dummies is the ultimate reference guide for anyone looking to understand dark pools and dark liquidity, including the different order types and key HFT strategies.
