June 12, 2012
A news-breaking account of the global stock market’s subterranean battles, Dark Pools portrays the rise of the “bots” – artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to outmaneuver the humans who’ve created them.
In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy. Levine wondered, What if the little guy could see all trades in real time and, in the process, cut out the middlemen who picked his pocket with every trade? But for that to happen, the market had to be plugged in.
So Levine created a computerized trading hub named Island, where small traders swapped stocks. Soon after its launch, Island spawned a trading revolution that would reshape the market. Eventually, Levine’s creation became the electronic version of the New York Stock Exchange, and in a few short years the world’s capital flowed through a vast jungle of fiber-optic cables.
But then, the market that Levine had sought to fix had turned upside down. The giant institutions and the little guys had developed a shared interest, and they were both imperiled. The solution: “dark pools” – secretive exchanges where the “whales,” big institutional investors who often traded the little guys’ money, could move through the turbulent electronic waters unmolested. But soon the bots acquired night vision; they learned how to peer into the darkness. Growing savvier with each tick of the tape – always learning – they steadily fed on the whales, evolving into a new breed of high-speed middlemen.
Dark Pools is the fascinating story of how global markets have been hijacked by trading robots – many so self-directed that humans can’t predict what they’ll do next. And it shows how the new players moving into artificial intelligence are on the verge of tipping the entire system toward a global meltdown that could happen in minutes – maybe even seconds.
Scott Patterson is a staff reporter at the Wall Street Journal, covering government regulation from the nation’s capital. His first book was the New York Times bestselling The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. He lives in Alexandria Virginia.