Brian asked:

Someone remind me exactly how the dark pools inside banks helped the HFTs? Was it to sniff out buyers/sellers and then front-run them at the actual exchanges? Why would this be necessary? Because otherwise other HFTs will get access to those orders sooner and be able to beat an HFT who waits till the order gets to BATS or whatever exchange sits just over the river?

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Keith Hawkins The banks advertised the dark pools as ways for large investor clients (mutual funds, hedge funds, pension funds, etc) to avoid being abused by HFT firms. But, as Lewis described it, the banks running the dark pools were actually more aligned with the HFTs (who paid them fees for access to orders in the pools) than they were to their own investor clients. When an order was placed in the dark pool which could not be filled immediately instead of routing to the other exchanges to get the best price for the customer (as they were supposed to), the banks would allow order would sit in their pool while the HFTs would purchase the shares cheaper on other exchanges and then sell them to pool to fill the dark pool customer's order. The amount of time the orders sat in the pool while the HFTs front ran the order was milliseconds (less than a eye blink) so the investor customers would never know they were getting slightly worse fills in the pool. So instead of protecting the large investors from HFTs, the dark pools actually opened them up to being abused. The HFTs were the lions and the banks were setting up the watering hole to attract the investors as prey.
Frank Essentially a bank would put a order in a dark pool, an HFT would get access to that order (information no one else should have) and check all the major exchanges.

If the order was to buy 100,000 share at 80.00, the HFT might find a seller at 79.98 on NYSE 100,000 shares. The HFT buys the order in full at NYSE, then fulfill the order. The bank gets money from an HFT to get that extended information, they also get a sale on their Dark pool which makes their dark pool look better, the HFT gets to keep the two cents (minus anything they have to pay to the bank) And the investor loses out on the 2 cents, or in this case $2000 dollars. It's not much on a 1.6 million dollar order, but it's still $2000 dollars he missed out on.

There's more ways to increase that especially with kick backs but that's the very basic version.

Sadly I don't feel Michael Lewis fully answered that part of the book (both what HFTs were doing and what the dark pools were.)
Kay I think . . . That dark pools first sold or bought among themselves, taking all the fees for the buy and sell. Then, if they couldn't fulfill themselves, they they basically "sold" the information to the HFT by sending it out to the market, but through a channel that gave the HFT the millisecond needed to see the coming trade, do the opposite of what was needed (buy if it's a sell order, sell if it's a buy order), driving up or down the price, then taking that percentage of a point on the trade, without ever having to risk or own anything.

I'd love someone else to weigh in and tell if I'm even close in my "thinking".
Karolis Mažukna They sold back straight in the dark pools
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