Scott Patterson relates with all the skills of an accomplished and seasoned Wall Street Journal reporter, the captivating but somewhat alarming tale of evolution of the 'quant-geek' algorithm driven computer programming with the sole intention of spawning a whole new generation of get-rich-quick-barrow-boy-traders who used the phenomenal computer speeds made possible by the geeks to create a radically new trading system in which machines trade anonymously with other machines, making and losing fortunes in the blink of an eye. Often these artificially intelligent machines operate in lightly regulated exchanges, and trade vast sums of money behind closed doors , without any meaningful attempt to participate in the conventional investment scene, just purely hyper fast transactions that try to take advantage of pricing differentials that momentarily exist in the market. This activity whilst only yielding microscopic returns per transaction, nevertheless when repeated millions of times over a few seconds, have the potential of big returns for the 'speed barons'. The author does not conclude that this activity makes any positive contribution to the overall investment environment other than putting 'liquidity' into the system, whatever that means. For sure this book charts the enormous advance in computers making it easier to do lots of things faster, but other than for casino type trading activities there does not seem to be any conclusive evidence that this speed is actually beneficial to humanity or, indeed necessary- just a potentially dangerous procedure for making 'fast' bucks whatever the consequences.
The central re-occurring character in the book who kicked off the Artificial Intelligence thrust is Joshua Levine who in 1996 launched his company 'Island' to fast trade and show others how to use their computer systems to do likewise. Joshua was everyone's visualization of a computer geek, scruffy, baseball hat, seemingly disorganized, no respecter of dress or manner codes in whose chaotic office, could be found among the hubris of discarded food and drink cartons, a live giant lizard in an inflatable paddling pool, and a real bazooka. But he was a genius at what he did and not only paved the way for the likes of Sheldon Maschler, Jerry Putnam, Dave Cummings and others to enter the world of computerized trading.
Thomas Peterffy of Timber Hill, an early respected advocate of electronic trading became very concerned at the direction these super-speed machines which had started to bring a casino aspect to share trading. He voiced his concerns in a much reported speech in October 2010 in Paris at the annual meeting of The World Federation of Exchanges.
"Dark Pools" is a really gripping book that I found difficult to put down and although I will not pretend that I fully grasped every intricate detail of what Joshua Levine and his like-minded cohorts were trying to concoct, I was fascinated if not a little alarmed about what goes on behind the scenes in a market place to which us 'Joe Ordinaries' entrust our savings. Perhaps to bring perspective into the debate on the the usefulness of computers in our lives, Emo Philips was about right when he said "A computer once beat me at chess, but it was no match for me at kick boxing."
A highly commended read.