Some of you will be aware that I am writing a book on high frequency trading and dark pools. It’s all very grown up, I have a publisher and everything (Wileys) and I am doing my best impersonation of a real writer by being woefully and consistently behind on deadlines. I won’t reveal too much about the book just yet, some of you already know the exact title of the book, those of you who don’t.... well… when it comes out I think you’ll be surprised.
Since I’ve been immersed in the world of HFT and dark pools this past few months I though I might comment on it a bit as Barclays is facing a massive lawsuit in the great state of New York for basically rigging its dark pool against its own clients. Let’s all feign mock surprise and horror.
No one knows anything.
Seriously. No one knows anything. If you understand and internalize this one single point regarding the debate surrounding HFT and dark pools you will understand more than 98% of the people that are themselves so called experts.
No one knows anything.
You know what, I don’t think I made my point clear enough. Let me give you some examples:
All the people in the video clip above know nothing. Michael Lewis, who wrote the brilliant book Flash Boys, he knows nothing. William O’Brien, that bat-shit crazy guy throwing a hissy fit, he is the president of the appropriately named BATS exchange, well he knows nothing. Brad Katsuyama, who you can obviously see is a very smart guy indeed, well he knows nothing either.
(As for me, your humble narrator and soon to be published “expert” on HFT and dark pools? Sorry peeps, keep moving on, I’ve got bupkis for you. I know nothing.)
So why are we all so amazingly lacking in knowledge? The reason is each of the above mentioned people (myself excluded) are bona fide experts in their own thing. Even that loony fellow Mr. O’Brien there, who if he hadn’t have become the president of a stock exchange would’ve probably made a good catholic priest (you do the math). Even he knows a thing or two about the thing it is that he does, whatever it is that he does when he isn’t screaming.
The problem is this…
See, I’m getting to a my point at last…
The market is complex and each expert is an expert on a specific area of a very complex thing that is complex on several complex levels interacting in a complex way. I guess I'm trying to point out that there are complexities involved, yet the media forces these experts into a box and paints them as all knowing.
Think of it like this. One is an expert on flowers, one an expert on turf, another just wants to watch the kids play in the garden and suck on some ice lollies. Yet CNBC and the financial media sells them to us all as gardeners.
The thing is, there is no single market, there are multiple markets. There is no single trading strategy, there are a legion of different strategies. Add to the mix the fact that there are myriad possibilities in how an order is routed, Oh! and don’t forget that before the order is even routed you need to take a look at the assortment of special order types available.
The sheer combination of different thingimywhatsits going on at the same time on the markets are too much for a single person to comprehend. In fact, therein lies the greatest fragility to the markets. Since even the experts don’t know or understand how these different aspects react and interact with each other when there inevitably is a break down in one system we simply don’t know the ramifications it can have or the chain reactions it can cause. We have however seen the results, just look at what happened to Knight Capital or the Flash Crash of 2010.
So batten down the hatches and brace yourselves, there will be further implosions in the not too distant future, because we just don't know how this darn thing works.