Wall Street’s ‘Private Rooms’
79 comments
·March 17, 2025gruez
>They’re offering what are dubbed private rooms, gated venues that take the core benefit of a dark pool — the ability to hide big equity deals so they won't impact prices — and add exclusivity, specifying exactly who can partake in any trade.
I'm not sure what all the consternation is about. Even without dark pools you could always do direct trades[1] with a party of your choosing, which is even more private and exclusive. The "private rooms" mentioned in this article just makes this slightly more automated than some trader messaging his buddies on the bloomberg terminal.
[1] https://en.wikipedia.org/wiki/Over-the-counter_(finance)
Nifty3929
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.
oangemangut
If you look up RegNMS the goal is to make public markets fair by having rules that have to be met in order to trade. Dark pools allow participants to 'hide' information that's not public. It is mostly about the order books. If dark pool sell order for 1B of TSLA stock goes on the order book, only other members of the pool get that information. The dark pools are required to still follow RegNMS rules for trade prices, but there is an inherent asymmetry in the market information in this case as the dark pool participants can see the public markets and their dark pool in order to make trading decisions.
In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
gruez
>Dark pools allow participants to 'hide' information that's not public. It is mostly about the order books. If dark pool sell order for 1B of TSLA stock goes on the order book, only other members of the pool get that information. The dark pools are required to still follow RegNMS rules for trade prices, but there is an inherent asymmetry in the market information in this case as the dark pool participants can see the public markets and their dark pool in order to make trading decisions.
But traders can easily hide the size of their "true" order by breaking it up into chunks and constantly refilling the order if it's taken? This is basically trading 101. If you want to do a big selloff, you're not going to dump all of that in one order.
rtkwe
But by breaking up the order they have to wait and the market can move in reaction to their sell off unless they do it very slowly. Dark pools can completely hide a large sell or buy order from the market long enough to execute at the current strike if there's another member in the pool buying. They wouldn't use it if it didn't give them an advantage because it costs more than regular trades.
thaumasiotes
> In your neighbor's house example, it would be like if there was a street market auction for trading cards happening in your neighbor's front yard, but in the house your neighbor and another neighbor had gotten together to trade 100x the average #of cards using the prices they hear from outside, and the people outside only see the deal they made after it's done.
Isn't that how everything is traded? Am I supposed to be outraged that everything I buy retail also exists in a wholesale market?
reverendsteveii
It's manipulation by definition. These hidden trades exist to prevent other people from being able to act in their own best interest based on available information. This isn't about what's going on in your neighbor's house. Your neighbor's house is private, markets are public. This is about being at a public auction in the middle of bidding on something when someone else walks up to the crier, whispers a few words in his ear, and then the crier just quietly says "bidding is closed" and you have no idea who bought the item or for what price but now you have to try to price similar items.
oangemangut
In the case of Dark Pools, it would actually be the crier saying "a lot 10x the size of what I'm auctioning just traded somewhere else where none of you lot can trade for xx price". So after they say that you actually do know the price that they bought the item(s). This is since the dark pools have requirements to report to the trade tapes their trades in fairly similar latency to the exchanges themselves.
EDIT: The rules also dictate the allowed prices the dark pools trade at. They have to be within the national BBO, they can't just trade at whatever price they want. So the public auction is actually helping them find the prices, without their pre-trade information affecting the price before execution.
infecto
Not manipulation as most/all of these execute around the NBBO. Exceptions exist for extreme block trades that may give some price advantage do to the sheer scale but we are not talking about manipulation.
I can easily see the retail price of a good, I can go to a wholesaler or some other holder of this good and ask them if I can buy it at a cheaper price. They might tell me to kick rocks if I don't have volume. Pretty similar to a dark pool. Markets are both private and public everywhere.
gruez
>It's manipulation by definition. These hidden trades exist to prevent other people from being able to act in their own best interest based on available information.
So if I have a RTX 4090 to sell (a very sought after commodity these days), and I sell it to my buddy rather than listing it on ebay, I'm doing market "manipulation"?
fedeb95
your graphic card isn't a stock market.
wesapien
Depends on the volume
charcircuit
Your analogy is bad because this doesn't happen at a public place. People can't privately sell goods between each other. If someone someone sells their gold to a gold buying shop, that was not a public auction, yet people are still able to price gold.
nowayno583
Markets are supposed to be decision makers, and having pricing information be public helps firms and other allocators take better decisions. The question at hand is if the flow of information today is so fast that it deters smart decision makers because of other participants who can extract their decisions from them before they can act on them. Wether you believe markets should be more or less opaque should be decided by where you sit on this spectrum imo.
crazygringo
Insider trading.
Also potentially tax evasion?
johnmaguire
Isn't the problem that this allows for all kinds of forms of insider trading?
> Insider trading—the practice of buying or selling a company's securities based on material, nonpublic information—has long been a contentious issue in financial markets.
https://www.investopedia.com/terms/i/insidertrading.asp
There's also a question of whether they are good for the health of the overall market: https://www.cbsnews.com/news/finances-dark-pools-explained/
ikmckenz
> Isn't the problem that this allows for all kinds of forms of insider trading?
No, it doesn't. All trades are made public after they happen, as per regulations. There is no difference to insider trading regulations if a bad actor trades via a lit exchange or via a dark pool. Dark pools only "hide" pre-trade information, such as standing buy or sell limit orders.
JKCalhoun
Really? Isn't knowing that an extremely large trade is about to take place insider information?
JKCalhoun
It stands to reason that if the buyer/seller are seeking private rooms there is something unfavorable for them about "lit" trading. That alone should raise red flags.
ajross
It's by definition insider trading. If they made the trades in public the market price would change to reflect the demand. They don't want that to happen, they want the trade to happen at a non-market price set by people with information about the deal.
gruez
The "insider" in "insider trading" refers to trading on privileged nonpublic information, not arranging the trades in a private venue.
ikmckenz
No, "I am XYZ hedge fund and I want to buy stock ABC" is not material non-public information to XYZ hedge fund. If it was, any buying or selling of stocks would always be illegal, since you would be "insider trading" on your desire to buy the stock.
oangemangut
Even in dark pools the trades have to happen within the NBBO, they can't just trade at whatever price they want.
qweiop
I remember reading about dark pools and asking a friend in finance if the sector really is as corrupt as it sounds, his reply? "Oh much more"
reverendsteveii
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.
null
throwaway199010
[dead]
markus_zhang
Back in the day when I was day trading in a firm, dark pool was pretty much the only place that I could offload some stocks quicly when they went the other way. It was pricey though so we were told to use it as a last resort.
tedunangst
Funny, I got the same answer from my neighbor when I asked him how much the NSA satellites can see.
ketzo
Most informed “dark pools” comment
Nifty3929
Did he elaborate on this?
LatteLazy
Goldman and others got in trouble for selling access to the supposedly secret orders in their dark pools back in the day.
They were fined 800k I think?
I believe dark pools started growing post flashboys when people realising what hft meant and wanted an escape (see comment below). But as they got big they became a target in and of themselves (ecology in action I guess).
I worked in algo trading at the time (not hft, but anti hft)
gaadd33
Dark pools started in the 1980s once the SEC permitted securities to be traded off the exchange they are listed on. I think that was well before flashboys.
QuantumGood
And then they found that some of the liquidity in dark pools was by dark HFT.
zeroq
I worked for an investment bank and on the inside no one even pretends, it's just a part of the job.
null
robertlagrant
I don't quite understand this - are these "rooms" where ownership of shares is tracked separately to how an exchange tracks them? E.g. I own 80% of a company, and I keep the official ownership, but let people buy them from me and from each other, but I keep the record of who owns them?
infecto
It's simply a mechanism to allow trades to happen outside of the lit market, not much to do with ownership tracking. The DTCC still "owns" the shares and the brokers are keeping track of individual ownership. There may be a clearing house to facilitate trades between brokers. Dark pools are available to retail traders via some brokers but of course most are not that easy to get into. Its really no different than trading on the open market but there is less available information.
moomin
If you think this is cause for concern, consider that most economic activity in the US isn’t even on an exchange to begin with.
jimbob45
Carlos Cabana, head of equity sales and trading at CastleOak, dubs the room a “diversity pool,” because the participants are all minority-operated brokerage firms. While in this instance CastleOak doesn’t know specifically who is on the other side of every trade, it knows it will be one of about 10 counterparties who meet certain eligibility criteria related to ownership and investment goals.
I am convinced that they only added this bit to make sure people would argue about skin color and ignore the implications of the rich making sure the peasants aren't allowed to play the same game as them.
potato3732842
It's far more likely that it's a tongue in cheek inside joke than it is they care what outsiders think. Or it's an internal reference that's a dig at someone or something and was never meant to be made public (these firms are small enough this kind of stuff can happen). Non-consumer facing finance is just about the least diversity conscious industry ever. They only care about green.
Source: work in industry.
Vecr
It's a dark pool.
dheera
I've been wading through terabytes of financial data over the past month. (I'm an ML/AI software engineer trying to create a trading bot that makes me more consistent income during times of uncertainty that are outside my control.)
This is some of the data I'm looking at. NVDA price on a particular day vs. average position of trades in bid ask spread aggregated over 10 seconds, on all the exchanges it is being traded on. When it is close to 1, it is trading at close to the NBBO ask; when it is close to 0, it is trading at close to the NBBO bid.
One of the things I found is that the dark pool trades predict price action very well on a few-minute time horizon. "FINRA Alternative Display Facility" on the 2nd plot from the top is all the darkpool trades. If I had access to dark pool trade data in real time I think I could piggyback off the manipulators and make bank.
Unfortunately the SEC only requires them to report transactions within 15 minutes, not in real time.
ElliotM
> Unfortunately the SEC only requires them to report transactions within 15 minutes, not in real time.
TRF reports must happen within 10 seconds or be submitted with a late modifier [0]. An executing broker systematically submitting all reports 15 minutes late would be investigated pretty quickly.
You can buy access to the consolidated tape from a marketdata provider, although this is going to be pretty prohibitively expensive for an individual.
[0] https://www.finra.org/rules-guidance/rulebooks/finra-rules/6...
dmurray
That's one of the purposes of darkpools, to let institutions trade large size without moving the market. No one's getting manipulated here: both the buyers and sellers know what's going on.
You can trade on these yourself - the darkpool operators are always looking for new market makers. All you need to do is agree to quote a few hundred US equities in decent size inside the NBBO, six and a half hours a day, and you too can have access to this flow.
rkagerer
If that's the case, couldn't the providers who operate the dark rooms (like OpenChronos) use their own realtime data to do so? Are there any who do that today? (i.e. monetized market surveillance). If so, does it run afoul of regulations?
dheera
I don't know, honestly. I would imagine it to be illegal to trade on that data before it's released to publicly-available trade streams.
I'm of the opinion that a huge amount of manipulation happens and the SEC either turns a blind eye to it or the SEC goes after easier fish that have worse lawyers to get their income.
jandrese
> I would imagine it to be illegal to trade on that data before it's released to publicly-available trade streams.
But what would be the penalty if you are caught? A few hundred million dollar fine? Absolute peanuts to any of the firms operating these pools. Of course there is corruption in the system, it is set up to facilitate corruption. Without corruption there would be little reason for these to even exist.
whatevermom
There might be other ways to know about the data in advance? Some kind of flaw somewhere that lets us sniff the “dark rooms”?
dheera
I tried to train a model to predict the darkpool transactions from the rest of the transactions. It didn't work. I'm back to the drawing board trying other things now.
null
PeterStuer
Anyone remember the not so distant past when you were labeled a "conspiracy theorist" when you mentioned dark pools?
ajsnigrutin
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 Bobson dumps his stock of ZX company? Well, now we know before they actually get dumped, and can sell our stocks too.
Buying stocks of a company for 1.7 seconds and selling them back is not an 'investment' by any kind of proper definition.
tremarley
Banning something doesn’t make it go away.
Millions of people will be doing it, irregardless if it’s banned or not.
The best thing you can do is let it happen, monitor it and call out bad actors.
jandrese
Calling out bad actors doesn't work so well if said actors have no shame.
JKCalhoun
Wild if true.
kubafu
This. What's the difference between hft and gambling? Yet we put tight rules on gambling.
markus_zhang
109%, but of course such legislations won't get passed.
jandrese
But mah liquidity!!!
I'm not sure what value you are getting out of the second paragraph. If some politician dumps a ton of stock X and I go "oh no, I'd better get out of that as well", won't I still be in line behind not only the politician but also everybody who has bots that automatically act on his actions within nanoseconds? It gives you warning that a stock is about to crater, but there's nothing you can do about it without giving someone the power to jump the line, and power like that can only be abused.
mertleee
Historically, the "private dark room" has always been a mechanism of goofy elites.
To an extent these will always exist - but what we define as investigative journalism will likely decide whether we hear about these at all haha.
tons of trades have been filled for a long time by IBing your buddy down the street. i don't see how this is particularly different/worse besides maybe improving efficiency.