Dark Pools: The rise of A.I. trading machines and the looming threat to Wall Street [Paperback]

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.

The machines apparently now have the power to pauperise us all -- or at least most of us. The message in Patterson's book is chilling -- and confirms to those who may have been wavering that stock markets are rigged, in favour of the house, with the punters perennially doomed to see their money whittled away by charges, slow execution and lack of information.

Patterson's book has echoes of Roger Lowenstein's When Genius Failed: The Rise and Fall of Long Term Capital Management and Michael Lewis's Liar's Poker (Hodder Great Reads). Stylistically it is well behind both, with Patterson's irritating business magazine punctuation and syntax doing his exposition no service. But when your mind becomes numb to the stylistic/linguistic quirks, the book is an excellent exposition of the way that the markets have changed beyond all recognition in the past twenty years. If the public were to appreciate the the way that the financial markets are now run the weight of anger might just bring the system tumbling down: here is the reason for under performing pensions and casino banking. This book and others like it have the potential to do great service: if more people read this book then maybe a better-informed public would demand change.

An excellent historical recount how the machines took over from people in the stock (and other) markets. It tells the stories of a handful of people who transformed the complete market despite of the wishes of the big players (i.e. the exchanges).
The title is misleading, as the book does not deal with dark pools.