Zerohedge reports that Credit Suisse are in discussions with the New York Attorney General’s Office and the Securities and Exchange Commission about alleged market manipulation in its Crossfinder dark pool. Some thoughts:
1. The NY Attorney General’s Office and the SEC are going to have a wealth of market-based information about CrossFinder that could inform industry research on high frequency trading (HFT) and dark pools arbitrage.
2. The academic literature on market microstructure identifies some of the mechanisms that electronic execution services use for HFT / dark pool arbitrage. But the academics don’t really understand how to utilise these mechanisms for alpha generation in the same way that electronic execution services do. The knowledge gap informs the algorithmic trading types that Credit Suisse uses.
3. Electronic execution services are now more sophisticated about flow trading. There is little public literature on this apart from hints in Stephanie Hammer’s Architects of Electronic Trading (New York: John Wiley and Sons, 2013) and the IEX discussions in Michael Lewis’s Flash Boys (New York: W.W. Norton and Company, 2014).
4. I have seen fill order and midpoint gaming in trades that I have placed. This highlights the value of carefully examining the course of a day’s trades / transaction records and comparing it with what is known about market microstructure (in both academic research and in on-going media coverage).