“Dark Pools”

With everything you’d expect from a best selling spy novel Dark Pools is a engaging and enthralling tale of how the financial markets went from the monopoly of the big exchanges,through a transition to computer trading in the hopes of transparency and efficiency, to the current model where speed trumps all, a frenzied bloodbath of maker taker piranhas, feeding on everything from the institutional whales to fellow HFT’s  unable to keep up in the unrelenting, unforgiving quest for speed.

That opening paragraph might sound a bit over the top and it is, but that’s how you come out the other end of reading Dark Pools. You feel fired up, energised, plugged in! I felt captivated through this read, honestly compelled to read the next chapter immediately, to take it everywhere I went in the hopes I might get five minutes spare to consume a few more pages. I even crammed it into my cockpit bag on the off chance we ended up stuck somewhere.

Scott Patterson uses the fast paced narrative style I loved in “The Quants” to equal success in this (not so) new title. The content is that wonderful balance of specificity and wide angle narrative. It has the detail required when dealing with such a complex subject but it’s perfectly weighed off with timely summaries and recaps to ensure you don’t get lost in the weeds. I’ve been meaning to read this book since it was published, having heard it being recommend, quoted and discussed in a number of interviews and documentaries, sadly it took me the best part of two years to get around to it. It was worth it.

With all books, timing was helpful in the quick success of Dark Pools I think, with both market participants and everyday investors growing wary of the way things were headed after hearing of the worrying events of the Flash Crash, the event itself so soon after the Global Financial Crisis. The nice thing however is that had I read it back in 2014 I don’t think it would have been any more valuable. I think this is a timely book that will remain timely in years to come and that I think is a real skill in writing. This book isn’t about pulling out gems hidden amongst the rough to help with your trading, it’s about bringing to a wider audience a hugely emotive and complex subject, to give a better understanding of where we were twenty years ago, where we are now and to how we got here. For me it does this supremely well.

When I started reading Dark Pools I had no idea I’d come out the other end feeling so conflicted about it’s participants. Depending on which side of the HFT fence you sit on might well dictate how you not only feel about the objectivity of the book, but also it’s motives. For me I think it does a great job of being objective and honest (although I’m not part of that world so how would I know I grant you). As a very small retail trader the current effect of the evolution of HFT in the US Treasury market is I think quite minimal. The chop in the market is evident for sure, but I don’t think I’m the target and so to some degree that’s a mitigation in itself, an ignorant one perhaps. There is an argument however that their presence does a lot in the long term that is detrimental to big institutions and thus to everyday people and their pension funds etc. That is an argument for another day and one that I personally am undecided on, I just don’t know enough.

I don’t even think Dark Pools makes an attempt to answer that question, I think it does a great job of staying on point, telling us what happened. The thing I enjoyed the most in the book were the characters. Usually with a book like this, especially one with so many moving parts, it’s very easy to loose sight of who’s in it, where they are in the events that are unfolding and why we should care about them. Not with Dark Pools. I found the characters to be well selected, well described and enjoyable to read about. There is no doubting their brilliance, intellect and to a large degree their achievements. The lasting take away for me is that aside from the ethics of what they created, the book is a testament to the marvel of the human mind, it’s vision and it’s determination. There is a constant theme of rebellion in the book, something which mainly is harvested by Josh Levine, the creator of Island. I have to admit I came out loving the guy, what he stood for, how he approached things and largely how he stood up to the financial establishment.

Throughout the chapters we are given glimpses into a market structure now long passed, where the powerhouses of the big exchanges controlled all, where the market makers and specialists enjoyed power and opportunity through an unquestioned legacy. Unquestioned until a new generation of thinkers decided to not just question but challenge the status quo. With the arrival of advances in computer technology they challenged hard and quickly brought about change, and change with a pace. Before long we’ve discovered how the computer revolutionised the structure of how our financial institutions and trading companies interact, witnessed all the famous financial shocks of the past twenty years and been introduced to the mind blowing potential of Artificial Intelligence.

This isn’t obviously a book about trading per se, it doesn’t pretend to be and no one is saying it is. I do however thing there are some cool take aways about the mindsets of successful traders. Firstly I notice scalping is a common theme, not only was it the weapon of choice for floor traders, it was a viable strategy from the days of the SOES Bandits right through to those of HFT’s trying to out scalp each another. I take a bit of comfort in that, why I’m not too sure, maybe because it makes me feel my preferred ways of trading are at least based on some sort of market heritage. Another theme that I see play out throughout the book is that of the illustrious quest for edge. Dark Pools gives numerous examples of trading firms and individual traders and the stories of how they sough an edge in the market. What is quickly and consistently apparent is that they all have one thing in common, they observed a lot, saw something that thought was exploitable and work hard to try and capitalise on it. I found that this once again gave some clarity that there is no secret sauce in the markets, that it comes down to hard work, experience and paying attention to whats there. Obviously the individuals in the book are hugely intelligent and I wouldn’t want to play their astounding capabilities down, but you get my point.

Reading this book has been a real treat. Not only has it inspired me to get trading, it’s made me remember the world can be changed, and it doesn’t take an army to do it. With everything from the behemoth establishment to the overlooked rebel, industrial espionage and corruption this book has astounding reach. Towards the end I found myself thinking about TRON and how the reality isn’t that far from it!It’s all there, M&A, big business, politics, ethics and at the end of the day an amazing story, it’s hard to believe it all happened. Dark Pools is a great read thoroughly recommended. Sit back with it, read it slow and enjoy it.

Any comments on the review? Read the book yourself and have something to say? Please leave a comment to discuss below. Given the huge scope of the book I’d be keen to get chatting about what you thought, the story, current financial climate or the wider ramifications of what might come next.

One final thing before I go – If you haven’t had a chance to check out Chat With Traders (no they aren’t sponsoring this or anything) and are pushed for time to read Dark Pools I’d check out the podcasts, a lot of the key players are on their and if you’re like me, it’ll definitely help get your head around some stuff and they are some great interviews.

Thanks for reading.

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