The Market Is Dark

Scott Patterson

I enjoyed Scott Patterson's first book Quant. Now he has a new financial chiller.

The Market Is Dark

By Scott Patterson on June 26, 2012

One of the primary themes in my new book Dark Pools is embedded in the title–the market is dark. It’s dark to regular investors, to institutional traders, to fund managers, to exchange operators, and to regulators. There are many reasons for this, but primarily it is due to the massive number of orders flooding the system from high-frequency firms and the complexity of how those orders interact with other orders inside exchanges and dark pools. Essentially, the market has become too complex, and too fast, for the human mind to follow or even remotely understand.

That’s a problem–a big problem. Because retail investors are starting to realize that no one is watching. Even Mary Schapiro, chairman of the SEC, has told Congress that her agency doesn’t have the ability to track what’s going on in the stock market (and just forget options). So who can know? Who can reassure the investing public that the market, despite many signs to the contrary, really isn’t rigged?

No one can.

The SEC has proposed building a computer system to track the market, the consolidated audit trail, which I wrote about for The Wall Street Journal last September. But there’s been little word of progress on the so-called CAT. Until there is, investors are going to remain in the dark.

Dark Pools

Dark Pools

High-Speed Traders, A.I. Bandits and the Threat to the Global Financial System
by Scott Patterson

A news-breaking account of the global stock market’s subterranean battles, Dark Pools portrays the rise of the “bots”– artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who’ve created them.

In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy.  Levine wondered, What if the little guy could see all trades in real time and, in the process, cut out the middlemen who picked his pocket with every trade?  But for that to happen, the market had to be plugged in.

And so Levine created a computerized trading hub named Island where small traders swapped stocks.  Soon after its launch, Island spawned a day-trading revolution that would reshape the market.  Eventually, Levine’s creation became the electronic version of the New York Stock Exchange, and in a few short years the world’s capital flowed through a vast jungle of fiber-optic cables.

By then, the market that Levine had sought to fix had turned upside down.  The giant institutions and the little guys had developed a shared interest, and they were both imperiled.

The solution: “dark pools” – secretive exchanges where the “whales,” big institutional investors that often traded the little guys’ money, could move through the turbulent electronic waters unmolested.  But soon the bots acquired night vision; they learned how to peer into the darkness. Growing savvier with each tick of the tape — always learning – they steadily fed on the whales, evolving into a new breed of high-speed middlemen.

Dark Pools is the fascinating story of how global markets have been hijacked by trading robots – many so self-directed that humans can’t predict what they’ll do next.  And it shows how the new players moving into artificial intelligence are on the verge of tipping the entire system toward a global meltdown that could happen in minutes – maybe even seconds.

Online Radio show: The Brian Lehrer Show
Trading Machines with Scott Patterson


http://www.wnyc.org/shows/bl/2012/jun/29/trading-machines/