The problem is that you cannot hide a big large institutionnal order from the High Frequency Traders. And if you try to execute that kind of order on the market place the High Frequency traders will jump on it and make the price much more expensive for the big institutionnal player.
Well how that works. So we have a bunch of high frequency trading robots all over the place. They are very different. Some are actively participating in the market making a lot of orders that are cancelled all the time with the purpous of detecting institutionnal volume and jump on it. Others are more passive and tehy scan through mathematical algorythms for opportunities and jump in only when the others detect something.
The result is when a large institution like a pension fund is buying the HFT are detecting it. And they jump on it. All this happens in split seconds. Then something onteresting happens that forms a pocket of predictability. This pocket of predictability attract other algorythmic traders even not necesseraly HFT. And then the machines start to have a very correlated behaviour and drive the prices in the direction of the big institutionnal player. And the intitutionnal player has to pay higner prices to buy the shares he wants to buy.
So what are the solutions from him. One of the solutions is to use himself a high frequency strategy in order to hide from the other high frequency algorythms. So there is a constant game of hiding and hunting at tremendous speeds that is going on the market.
The other solution for the big institutionnal player is to organize in dark pools. Those dark pools are traded secretely between only institutionnal players. And they do so because they do not want to affect the market, and get detected by the market.
Doing so they transfer shares between them at very competitive price.
However the regulators are looking them with very suspicious eye. Dark trading is not what a regulator may like. It is against the stock market logic.
But on the other hand the big institutions has to protect the interests of their shareholders. Imagine a pension fund, it is protecting the general interest. Why should they buy at the market place when they are certain to produce a big pocket of predictability that will be full in a milisecond with High Frequency Traders.
The other solution is to forbid the high frequency trading. Or to make a prohibitive tax. Well on this side the High Frequency traders are providing a liquidity.
The solution is not obvious. But in someway dark pools are protecting the market against flash crashes, provoked by high frequency nerds exploiting pockets of predictability
Here it is a video explaining really nicely what dark pools are.
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