The Dark (Pool) Truth About What Really Goes On In The Stock Market

Tyler Durden's picture

Courtesy of the author, we present to our readers the following excerpt from Dark Pools: High-Speed Traders, AI Bandits, and the Threat to the Global Financial System, by Scott Patterson, author of The Quants.

In early December 2009, Haim Bodek finally solved the riddle of the stock-trading problem that was killing Trading Machines, the high-frequency firm he’d help launch in 2007. The former Goldman Sachs and UBS trader was attending a party in New York City sponsored by a computer-driven trading venue. He’d been complaining for months to the venue about all the bad trades—the runaway prices, the fees—that were bleeding his firm dry. But he’d gotten little help.

At the bar, he cornered a representative of the firm and pushed for answers. The rep asked Bodek what order types he’d been using to buy and sell stocks. Bodek told him Trading Machines used limit orders.

The rep smirked and took a sip of his drink. “You can’t use those,” he told Bodek.

“Why not?”

“You have to use other orders. Those limit orders are going to get run over.”

“But that’s what everyone uses,” Bodek said, incredulous. “That’s what Schwab uses.”

“I know. You shouldn’t.”

As the rep started to explain undocumented features about how limit orders were treated inside the venue’s matching engine, Bodek started to scribble an order on a napkin, detailing how it worked. “You’re fucked in that case?” he said, shoving the napkin at the guy.


He scribbled another. “You’re fucked in that case?” “Yeah.”

“Are you telling me you’re fucked in every case?” “Yeah.”

“Why are you telling me this?”

“We want you to turn us back on again,” the rep replied. “You see, you don’t have a bug.”

Bodek’s jaw dropped. He’d suspected something was going on in- side the market that was killing his trades, that it wasn’t a bug, but it had been only a vague suspicion with little proof.

“I’ll show you how it works.”

The rep told Bodek about the kind of orders he should use— orders that wouldn’t get abused like the plain vanilla limit orders; orders that seemed to Bodek specifically designed to abuse the limit orders by exploiting complex loopholes in the market’s plumbing. The orders Bodek had been using were child’s play, simple declarative sentences sent to exchanges such as “Buy up to $20.” These new order types were compound sentences, with multiple clauses, virtually Faulknerian in their rambling complexity.

The end result, however, was simple: Everyday investors and even sophisticated firms like Trading Machines were buying stocks for a slightly higher price than they should, and selling for a slightly lower price and paying billions in “take” fees along the way.

The special order types that gave Bodek the most trouble—the kind the trading-venue rep told him about—allowed high-frequency traders to post orders that remained hidden at a specific price point at the front of the trading queue when the market was moving, while at the same time pushing other traders back. Even as the market ticked up and down, the order wouldn’t move. It was locked and hidden. It was dark. This got around the problem of reshuffling and rerouting. The sitting-duck limit orders, meanwhile, lost their priority in the queue when the market shifted, even as the special orders maintained their priority.

Why would the high-speed firms wish to do this? Maker-taker fees that generate billions in revenue for the speed Bots every year. By staying at the front of the queue and hidden as the market shifted, the firm could place orders that, time and again, were paid the fee. Other traders had no way of knowing that the orders were there. Over and over again, their orders stepped on the hidden trades, which acted effectively as an invisible trap that made other firms pay the “take” fee.

It was fiendishly complex. The order types were pinned to a specific price, such as $20.05, and were hidden from the rest of the market until the stock hit that price. As the orders shifted around in the queue, the trap was set and the orders pounced. In ways, the venue had created a dark pool inside the lit pool.

“You’re totally screwed unless you do that,” the rep at the bar said. Bodek was astonished—and outraged. He’d been complaining for months about the bad executions he’d been getting, and had been told nothing about the hidden properties of the order types until he’d punished the it by reducing the flow he send to it. He was certain they’d known the answer all along. But they couldn’t tell everyone—because if everyone started using the abusive order types, no one would use limit orders, the food the new order types fed on.

Bodek felt sick to his stomach. “How can you do that?” he said.

The rep laughed. “If we changed things, the high-frequency traders wouldn’t send us their orders,” he said.

* * *

More tomorrow

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swmnguy's picture

I don't know enough to be able to tell if this is bullshit or not, but it sounds about right to me.

Dr Benway's picture

And then they use the algos for other criminal aims, like manipulating up the share price before end of year to create the illusion of profits.



Only a banker could devise a way of stealing, and then a way of skimming from the theft, and then a way to scam the skim.

Cognitive Dissonance's picture

Only a banker computerized wiz kid accountant could devise a way of stealing, and then a way of skimming from the theft, and then a way to scam the skim.

The bankers are way too stupid to actually come up with this stuff. But they sure know how to hire those that do.

williambanzai7's picture

But they are smart enough to hire as many nerds as possible and lock them in a room.

Marginal Call's picture

They were smart enough to saddle the smart kid with 300K funny money debt so they owned the kids before they started. 

Leopold B. Scotch's picture

The way I beat their system is I run my trades through my Atari 2600, having modified the game of "Tank".

Marginal Call's picture

I run the ES contracts cululative delta bars through a  Tecmo Bowl simulation to generate buy/sell pressure signals. 

veyron's picture

The reality is that most of equities trading moved to dark pools and other trading venues. Trading on lit markets is "exhaust"

Herd Redirection Committee's picture

No shit, so you're telling me if I put in a limit order the 'big boys' can see my order, but I can't see their orders, and my limit will magically get hit!  Limit orders, a good way to guarantee you lose money in a rigged, computerized, HFT market.  I already suspected this was the case, what 4 years ago, so no surprise really.

jayg's picture

do you have a better way for us normies to place trades?

Silver Bully's picture

'do you have a better way for us normies to place trades?'


Yeah, its called buy physical and take delivery. Since these pukes own the system, don't expose yourself to ANY counterparty risk. Otherwise it'll get dumped on YOU.

Max Fischer's picture



So basically what you're saying is that it's better to own physical silver which collapsed by 50% in 14 months than it is to own Apple stock because owing Apple equity exposes you to the possibility that Apple might go bankrupt?  How much wealth do you need to lose before the "no counterparty risk" component becomes just fucking stupid?

Sometimes I think that silver hillbillies like to throw around 'no counterparty risk" because they think it sounds cool.  


blindfaith's picture



WOW, can't tell if you got the thumbs down because of apple or silver comments.

Will say this, silver will be here in 10 years, will apple?

MeelionDollerBogus's picture

Computers will still exist in 10 years. Stupid people who insist on shiny things which are overpriced and barely work will still exist. Therefore Apple will still exist.

CalibratedConfidence's picture

"Silver oxide-zinc is used in batteries for digital cameras, watches, and phones. Recently it was announced that all Apple products will be using silver oxide-zinc batteries".

You Can’t Beat Silver as an Investment


SWRichmond's picture

As I read this article I just kept thinking "so this is just another example of how true price discovery is thwarted, and thus genuine capitalism is screwed."

tennisdude's picture

Ok. Keep doing what you're doing then.

MeelionDollerBogus's picture

Silver has lots of non-monetary uses. If all you want is paper then use options so you get cash value for silver's price moves BOTH ways.

Maxipad, you are an unwanted attempted replacement for MDB.

No-counterparty-risk IS cool. It means no one can empty my account or re-write signatures or force me into negotiations while they hold my money hostage. They can't see it, touch it or even know I have it. It's MINE.


SoCalBusted's picture

In short, No.

You need the following:

1. big hardware

2. a fat pipe to the exchange

3. knowledge of the inner workings of the black box

4. ability to program T-SQL with multiple terms in the WHERE clause

If you have been on ZH for any length of time you already know by now that if you want to play, you are in the retail stock trading ghetto and will lose anyway.  The best way to win is to not play the game. (see War Games)

GMadScientist's picture

5. friends at Goldman

6. friend at the Morgue

7. friends at the SEC

8. friends at the CFTC

9. friends at the DoJ

10. friends in the SCOTUS

GMadScientist's picture

"do you have a better way for us normies to place trades?"

MeelionDollerBogus's picture

Options. I only trade GLD, SPY, VXX, AGQ using options. I don't even need to use margin.

MeelionDollerBogus's picture

If you pay to sit in the pits or get a better feed you can see their limits too. However you'd also need to know their latency and their fees and liquidity bonus to make best of the information.

In the mean time set limits higher or lower than the average as-per your needs to avoid being hit with the others.

The HFT's are also not watching highly illiquid (compared to stocks) options chains so by putting myself there I never get nailed by HFT's. Also typically stock-trades at extreme price changes lasting less than 1 second don't even register for the options that are linked to them. IF they do that usually is very good for me. If they don't then to me it's as if it didn't happen. I appreciate what NANEX reports but at the same time I appreciate a buffer stopping that shit from hitting my windshield.

BandGap's picture

And I'd bet a lot of $$$ the "nerds" have no idea what their work is being used for. They write the module and someone else assembles them. I wrote modules in Pascal years ago that I could use for NMR pulse sequences or to figure out how often to spray crops for pests. Two totally differnet outcomes using the same prewritten pathways.

Just takes a guy at the top with a fair amount od savvy in programming and a vision of where he wants to go.

Wonder if they beta tested these? Hard not to notice the glitches as they ironed things out. Then again, no one was probably looking. I like the delay factor written into the executions. This makes it doubly hard to spot.

Wow, thieves are SMART.

disabledvet's picture

So long as that room is in their head then "they are free to be anywhere they want."

slewie the pi-rat's picture

the quaint faulknerian quants made her fuking quim quake, BiCheZ!

Bansters-in-my- feces's picture

Dr Benway,I see a banker read your comment.

FuckTard he be.

X.inf.capt's picture



that they think the markets are rigged....

that the only reason the stock market goes up at the end of the month ( on low volume) is so when 401k's post, the small investor has to buy high....

and that the markets are just another ponzi scheme for the elite to wick more wealth from the middle class....



Freddie's picture

This reminds me of the movie Casino which was based largely on real people and events.  Joe Pesci talks about how the casino counting room was skimming the skim. Less and less skim money got back to the old mobsters in Kansas City.

Dustin de Wynde's picture


That's exactly right.

And it's fresh in my mind because I've been using this clip:

To explain the Facebook IPO Skim to people, but it works just as well here too.

In fact it's even more relevant, since if this is even half true then the level of endemic fraud is at least an Order of Magnitude greater than Fuckerberg's little scheme was.


rodocostarica's picture

Hope you saw that movie on the net or in the theater and not on TV Freddie.


Buck Johnson's picture

The whole game is rigged pure and simple, and eventually the whole game will come crashing down.

cifo's picture

Outrageous and unfukingbelievable!

RECISION's picture

Still... you've gotta admire the ingenuity of these sociopaths. 

SubjectivObject's picture

I dunno. put you in a room, well paid, to think up stuff, with a no restrictions scenario, and you are there.  Easypeasy to be a cunning mammal, the new brain only adds to the possibilities.

blindfaith's picture


Why unbelievable?  Look at that smirk on Cramer's Face on the ad at the right...he knows!

What might be hard to believe is that there is a spybot on your computer trate station that knows what you are doing in the first 3 keystrokes and is already out running you. No 'spyware' is going to catch it.  The idea is to slowly bleed you....and you hope that you will get lucky and regain your 'health'.

Even your 'smart phone' tracks you, why not a trade program.

Sudden Debt's picture

what bothers me is that the markets don't get in front of the game and alter the system in a way that it's fair to play the market for everybody.
this has got nothing to do with technocals anymore. it's fronting the lemmings and stealing theor money with fraud systems.
why don't they force 20 second min. price offers and 30 minutes that a stock can't be solved and the HTF stops there.

Debugas's picture

good point

it should not be a problem to collect all orders during an hour time period into a black box and then open it once per hour and reconciliate. 24 price fixes per day is more than enough

Debt-Is-Not-Money's picture


"...and you hope that you will get lucky and regain your 'health'."

It's called "investing"!


MeelionDollerBogus's picture

Bu...bu...but ... Cramer's wearing my favourite snorgtee!!

Offthebeach's picture

I picked up "Wall Street Jungle". Written in the 70's. Back then floor traders kept their book with non registered /side trades. It's all,as always, about the incentives. Whatever system there is, people will game it.

Yes_Questions's picture



The hook here is the concept of "saving" for retirement, education, etc.  The pros in equities know about HFT but does the worker bee?




Neither does any other "consumer" of equities.


Its bullshit, and its bad for you.

mrdenis's picture

This is not BS ,I use Fidelity and figured this out about 6 mos ago all depends on who you route your order through (NYSE ARC NASDQ or one of the others )you must use one of the off market (dark pools?) the only way to access this market is you must use fidelity's active trader  you can designate exactly where you want your order going ...if the market is 21.95 21.96 ,, you must put your order out to but at 21.96 won't get filled ,and your order dosen't show up on the quote but if someone sens a sell at 21.95 you'll buy his shares at 91.25.001 ..and if the bid gets hit for all the shares you might not buy any but at a even lower price21.94.001. I believe it has to do with the exchanges and where it trades .If your putting your orders out on the NYSE you'll get eaten aiive every day . 

Stuck on Zero's picture

I used to day trade through eTrade and then something changed about five years ago.  I started getting shafted on every order.  Whether it was a limit order or a market order I would get a slow response and then end up on the tail end of a spike.  I didn't have that problem when dealing with a personal friend who was a broker at UBS.  The tricks are all there.  My words of advice.  Don't send any money to Wall Street.  You will be shafted.  Keep your money at home.  Buy a rental property.  Start a business.


Socrates's picture

I spent 27 years as a trader on Wall Street. BELIEVE THIS BOOK and believe that they won't be stopped until the DOJ is not filled with white collar crime lawyers!


The Wall Streeet mindset is to take whatever is possible however possible as long as the cost of doing business (the fine of a settlement agreement) is less than the "take"

old naughty's picture

More Tomorrow...
there is more?
Of course, there is. Stupid me.

Bringin It's picture

The toxic pools of naked shorts, in the metals, but really all over the place, that can never be covered/resolved is like the burning building no one sees.  They can't stop, because once they do most of the scams see the light of day.

Nage42's picture

Ah, but if you buy in to the authors claim, then there is a bigger game afoot.

So the "lit" market of futures shows that the big houses are putting "years of production volume" against the price to artificially surpress it, right?  That's what you can _see_.

These big banks arn't stupid (well, they are mostly stupid, but they do have some nasty pieces of work at the helm), so if there's a tip-of-the-iceberg you can see, you really need to be figuring out what's going on under the surface...


Given the price surpression at spot, and the gutting of producer equity, my feeling is that some parties (possibly using banks as a vehicle to get it done) must be out there trying to buy up future-mine-production or, even better, refining to choke the sourcing.  So while the left hand is hitting the sell button, the other seven hands are quietly hitting the buy-now, buy-short-term, buy-mid-term, buy-long-term, and buy refining.   Game, set, and match.


The futures surpression is old news... stop ranting about it and find out what's _really_ going on (the hands you can't see in lit markets).


Just my 2 cents.