Dark Pools and High Frequency Trading For Dummies

2015·3.46 MB·English

by  Jay Vaananen

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