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Dark Pools and High Frequency Trading For Dummies

Book Description

A plain English guide to high frequency trading and off-exchange trading practices

In Dark Pools & High Frequency Trading For Dummies, senior private banker Jukka Vaananen has created an indispensable and friendly guide to what really goes on inside dark pools, what rewards you can reap as an investor and how wider stock markets and pricing may be affected by dark pools. Written with the classic For Dummies style that has become a hallmark of the brand, Vaananen makes this complex material easy to understand with an insider's look into the topic.

The book takes a detailed look at the pros and the cons of trading in dark pools, and how this type of trading differs from more traditional routes. It also examines how dark pools are currently regulated, and how the regulatory landscape may be changing.

  • Learn what types of dark pools exist, and how a typical transaction works

  • Discover the rules and regulations for dark pools, and some of the downsides to trading

  • Explore how dark pools can benefit investors and banks, and who can trade in them

  • Recognize the ins and outs of automated and high frequency trading

  • Because dark pools allow companies to trade stocks anonymously and away from the public exchange, they are not subject to the peaks and troughs of the stock market, and have only recently begun to take off in a big way. Written with investors and finance students in mind, Dark Pools & High Frequency Trading For Dummies is the ultimate reference guide for anyone looking to understand dark pools and dark liquidity, including the different order types and key HFT strategies.

    Table of Contents

      1. Introduction
        1. About This Book
        2. Foolish Assumptions
        3. Icons Used in This Book
        4. Beyond the Book
        5. Where to Go from Here
      2. Part I: Getting Started with Dark Pools
        1. Chapter 1: Focusing on Dark Pools and High Frequency Trading, Just the Basics
          1. Defining Dark Pools: Why They’re an Investment Option
          2. Explaining What High Frequency Trading Is
          3. Knowing Who’s Involved When Investing in Dark Pools
            1. Brokers can make or break you
            2. The other important folk
          4. Looking at the Order Types
            1. Considering the regular order types
            2. Eyeing the special order types
          5. Regulating the Markets: Legislators Take Action
        2. Chapter 2: Taking a Dip into Dark Pools
          1. Taking a Snapshot of Dark Pools: What They Are and Aren’t
            1. Settled outside the public eye
            2. Need for secrecy: Dark versus lit
            3. Improving price
          2. Examining How Dark Pools Work: Step by Step
          3. Weighing the Rewards and the Risks
            1. Identifying potential rewards
            2. Recognising the risks and preparing for them
          4. Investigating Whether Your Trades Are Exchanged in Dark Pools
            1. Asking your broker the right questions
            2. Sleuthing on your own if you don’t use a broker
          5. Making the Best of Your Transactions
        3. Chapter 3: Grappling with the Ins and Outs of Securities Markets
          1. Figuring Out Pricing: The World of Bids and Offers
            1. Grasping how pricing works
            2. Looking at opening and closing prices
            3. Looking at the highest and lowest prices
          2. Making Buying and Selling Easier: Liquidity
            1. Market liquidity
            2. Off-market liquidity
          3. Understanding the Importance of Market Makers
            1. Using VWAP and MVWAP
            2. Getting to grips with order routing
            3. Focusing on price/time priority
            4. Eyeing direct market access
      3. Part II: Diving into Dark Pool Markets
        1. Chapter 4: Introducing Dark Pool Providers
          1. Comparing the Different Types of Dark Pool Providers
            1. Big-time investments: Block-oriented dark pools
            2. No minimum shares required: Streaming liquidity pools
            3. Crossing pools
          2. Looking at Bank- and Broker-Owned Providers
            1. Barclays LX Liquidity Cross
            2. CrossFinder
            3. Fidelity Capital Markets
            4. GETCO/KCG
            5. Sigma X
            6. ConvergEx
            7. Alpha Y
            8. DBA/Super X
          3. Looking at Exchange-Owned Providers
            1. International Securities Exchange (ISE)
            2. New York Stock Exchange/Euronext
            3. BATS Global Markets
          4. Eyeing Some Providers That Have Been Bought Out
            1. Chi-X Global
            2. Instinet
        2. Chapter 5: Meeting the Players and Places
          1. Recognising Who the Market Makers Are
            1. Heading towards extinction: The human touch
            2. Going the automated route
          2. Examining the Venue: Where All the Action Takes Place
            1. Knowing the venue options
            2. Differentiating between stock markets and dark pools
          3. Identifying the Cast of Characters
            1. Brokers and dealers
            2. Private investors
            3. Regulators
            4. Data centres
            5. Journalists, bloggers and writers
            6. Academia
            7. Automated traders
        3. Chapter 6: Regulating Dark Pools
          1. Relating to Regulation
            1. Defining regulation and legislation
            2. Taking action to be more empowered about legislation and regulation
          2. Eyeing Regulation of Dark Pools in the United States: Reg NMS
            1. Rule 610: The market access rule
            2. Rule 611: The order protection rule
            3. Rule 612: The sub-penny rule
          3. Looking at Europe — the Fastest-Growing Dark Pool Fixture
            1. Markets in Financial Instruments Directive
            2. Financial transaction tax (FTT)
          4. Considering Other Markets
            1. Canada
            2. Asia
            3. Australia
      4. Part III: Coming to Grips with Automated Trading
        1. Chapter 7: Comprehending Automated Trading
          1. Identifying Quantitative Analysts
            1. What makes a good quant
            2. What quants do
            3. Why quants are essential
          2. Entering the Realm of the Algorithm
            1. Knowing what an algorithm is
            2. Building an algorithm
            3. Letting an algorithm loose on the markets
        2. Chapter 8: Grasping Standard Order Types
          1. Identifying the Standard Order Types
            1. Comprehending price time priority
            2. Gobbling up everything: At-market orders
            3. Setting the price on a matching trade: Limit orders
            4. Managing risk: Stop orders
          2. Identifying Advanced Standard Order Types
            1. Hiding behind the full amount: Iceberg orders
            2. Wanting it now: Fill or kill orders
            3. Executing only a portion: Immediate or cancel orders
        3. Chapter 9: Identifying the Special Order Types
          1. Getting a Hold of the Basics of Special Order Types
            1. Eyeing their characteristics
            2. Differentiating between routable and non-routable orders
          2. Providing Firms with Rebates: Post-Only Orders
          3. Moving to the Next Level: Hide and Not Slide Orders
          4. Getting the Best Possible Price: Peg Orders
            1. Lining up first: Primary peg orders
            2. Buying based on offer price and selling based on bid price: Market peg orders
            3. Matching in the middle: Midpoint peg orders
          5. Executing Quickly: Intermarket Sweep Orders (ISOs)
        4. Chapter 10: Delving into High Frequency Trading
          1. Tackling the Definition of High Frequency Trading
            1. Eyeing HFT: What it’s all about?
            2. Recognising characteristics of high frequency traders
            3. Examining what high frequency traders do
          2. Predicting the Future of HFT
            1. Technology — staying ahead of the times
            2. Markets — looking for new venues
            3. Legislation – preparing for future regulations
            4. Academic study — listening to the whizzes
        5. Chapter 11: Understanding Key High Frequency Trading Strategies
          1. Scalping for Your Pennies
            1. Peering into the world of scalping
            2. Identifying what can go wrong with scalping
            3. Scalping the automated route
          2. Pinging to Gather Valuable Information
            1. Identifying what pinging does
            2. Examining whether pinging is fair
            3. Looking at pinging in action
          3. Gaming like a Casino
            1. Manipulating quotes
            2. Taking advantage of prior knowledge: Front running
      5. Part IV: Being Aware of the Risks of Dark Pools
        1. Chapter 12: Jockeying Too Much for Position
          1. Understanding How Front Running Impacts Your Investments
            1. Looking at insider information
            2. Having priority access to information
            3. Feeding the news data quickly
            4. Leaking news
            5. Locking up the news
          2. Examining Order Cancellations
            1. Gathering information
            2. Stuffing quotes
            3. Playing games
          3. Identifying the Impact of Slippage
          4. Knowing What You Can Do to Mitigate These Risks
        2. Chapter 13: The Ins and Outs of Flash Crashes
          1. Grasping How Flash Crashes Happen
            1. Blaming the news flow
            2. Holding humans responsible
            3. Computer programming loops
          2. Eyeing How Flash Crashes Spook the Whole Market
            1. Flash crashes draining liquidity
            2. Going from a lively market to a ghost town: Volume isn’t relevant
          3. Examining the Greatest Flash Crash of All Time
            1. The perfect storm triggered
            2. Theorising about the causes
          4. The SEC Speaks: The Official Version of the 2010 Flash Crash
            1. Noting the market’s appearance
            2. Identifying the participants
          5. Tracking the 2010 Flash Crash, Moment by Moment
          6. Criticising the SEC’s Report
          7. Considering an Alternative Version of the 2010 Crash
            1. Finding the exact moment
            2. Blaming HFT
          8. Analysing a Flash Crash
      6. Part V: The Part of Tens
        1. Chapter 14: Ten of the Best Dark Pool/HFT Websites
          1. Banker’s Umbrella
          2. Haim Bodek
          3. Themis Trading
          4. Scott Patterson
          5. Zero Hedge
          6. CFA Institute
          7. Nanex
          8. Able Alpha
          9. The Trading Mesh
          10. Healthy Markets
        2. Chapter 15: Ten Ways to Swim Safely in Dark Pools
          1. Watching the Bid Offer Spread Action
          2. Checking to See Whether Your Market Order Slips
          3. Identifying Changes in the Bid Spread
          4. Spotting 100 or 200 Block Orders in the Order Book
          5. Checking for Your Limit Number in the Order Book
          6. Verifying the Stock’s Spread
          7. Recognising Flash Crashes
          8. Reading a Tick-by-Tick Chart
          9. Talking to Your Broker
          10. Perusing the Executed Orders
        3. Chapter 16: Ten Common Algorithmic Strategies
          1. Market Making
          2. Getting Liquidity Rebates
          3. Deviating from the Norm with Statistical Arbitrage
          4. Catching the Short-term Momentum
          5. Employing Latency Arbitrage
          6. Following the News
          7. Igniting Momentum
          8. Combining a Dark Pool and Lit Markets
          9. Factoring in the Participation Rate
          10. Weighting for Time
        4. Chapter 17: Ten Things to Know About Market Microstructure
          1. Market Access Speed
          2. Order Types
          3. Networks
          4. Algorithms
          5. Fragmentation
          6. Order Routing
          7. Regulation
          8. Transparency
          9. Price Formation
          10. Market Intermediaries
      7. About the Author
      8. Cheat Sheet
      9. More Dummies Products