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What we’re reading this week

High Frequency Trading

Don Bollerman of IEX had something to say about high speed trading and the New York Stock Exchange. The op-ed piece was a fascinating read (to me) and I recommend taking the time to read it in full. His problem with the NYSE is that they effectively maintain 2 separate gateways to the market: one slow gateway for regular people and one super-fast, expensive gateway for high-speed traders looking to engage in “quote-fading” and “latency arbitrage.” For the uninitiated, this essentially boils down to being able to read active trades in the market and buy and sell positions at incredibly high speeds (micro-seconds) in order to make fractions of a cent. These fractions add up though, and these high-frequency traders make large sums of money at the expense of other market participants. Bollerman adds, these exchanges are “charging a premium to the fast which enables them to make money trading against the slow. Manufacturing those kinds of trading “opportunities” creates market share and revenue for those exchanges.” The average investor is beset on all sides when it comes to investing: lack of knowledge and resources, unscrupulous brokers, hidden commissions and fees, and now the exchanges themselves.


Apple released earnings in January and stated that iPhone sales grew at the slowest pace since 2007 and forecast that revenue in the current quarter will decline for the first time in 13 years. This begs the question, “what’s next for Apple?” Matt Levine of Bloomberg has a few suggestions, “Sell them a bigger iPhone on which they can play solitaire? Sell them a smaller iPhone they can wear on their wrists? Sell them a smaller wrist-iPhone, but plated in gold so you can charge more? Yes, good ideas, those are all things you can do.” Apple wants to focus on continuing to monetize it’s user base which amounts to “everyone already has our phones, so let’s just sell them stuff for those phones.” Not a bad idea given Apple’s 1 billion subscribed users. 

Dark Pools

They just sound scary don’t they? Dark pools or “dark pools of liquidity” are completely inaccessible trading exchanges used by institutional investors to facilitate block trading when they do not want their trades to impact the market as a whole. Credit Suisse Securities and Barclays recently settled with the SEC for their use, or misuse rather, of their dark pools, Light Pool (clever!) and LX, respectively.  According to SEC documents associated with the suit, Credit Suisse, described Light Pool (I really like that name) as “the Market for Long-term Investors” and said “Light Pool identifies and discourages short-term opportunistic traders” by “[u]sing an objective and transparent formula” that “classifies traders based on their short-term alpha.” CSSU explained that the Alpha Formula would operate as follows: “… what we’re going to do is, using an objective formula that classifies how – you are a pick-off artist or not, essentially, we’re going to split the flow into three groups…. Now, the people who are classified as opportunistic just get kicked out. They can’t come to Light Pool, that’s it.” If you are a short-term, opportunistic trader, don’t even think about Light Pool, it’s not for you! Many resulting trades were mishandled by CSSU by its “AES SOR” or Advanced Execution Services Smart Order Router and perceived as being short term and (get this!) opportunistic by the Light Pool algorithms. Concurrently, the Light Pool algorithm failed to keep out several high-frequency trading firms that were quite obviously engaged in short-term opportunism.  Yikes! It’s sort of a catch 22 for CSSU, one of the primary ways it identified short-term traders was whether or not the investor was making money investing in the dark pool: if you were successful in your trades, you were cheating. On the one hand, kudos to CSSU for structuring it’s client’s trades via “AES SOR” to make money. On the other hand, you really can’t allow large, institutional traders access to your special Light Dark Pool just because you want to make more money (some money?). 

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Categories: The Market

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