See You On The Dark Side Of The Market


Eclipse is the final track on Pink Floyd’s landmark album, Dark Side of the Moon. Roger Waters explained the meaning of the song, and in fact that of the whole album:

“The album uses the sun and the moon as symbols; the light and the dark; the good and the bad;
the life force as opposed to the death force. I think it’s a very simple
statement saying that all the good things life can offer are there for us to
grasp, but that the influence of some dark force in our natures prevents us
from seizing them.”

As most of you know, we wrote a paper back in May 2010 titled Data Theft On Wall Street, in which we discussed how order executions were tied back to order IDs, and how hidden orders were being leaked by NASDAQ to HFTs, who would use that information to trade ahead of institutional orders.

At the time, Nasdaq insisted nobody was using the data in the ways we described. They said the system was just like that for years, and that we were alarmist. Even in October 2010, five months after our paper, they still stuck to that story even though they changed their system so that some of the leakage would stop. From that October 2010 WSJ Jacob Bunge/Kristina Peterson article:

“While Nasdaq said the reference numbers could not be used by
anyone trying to game the system, the exchange will replace them with zeros to
ease any lingering worries.”

We wish to point out to you that NASDAQ still uses a hidden order identifier (B or S) that populates their proprietary data feeds. And we wish to point out an academic paper which has used that hidden data from NASDAQ’s proprietary feed to “show that hidden liquidity locations are predictable given the observable state of the market.” The paper is called On The Dark Side of the Market; Identifying and Analyzing Hidden Order Placements.

The authors are post-execution able to study hidden order placement on NASDAQ, and model their aggression and predictability. They address three research questions:

(i) Does hidden liquidity supply compete with observable order flow and react to trading directions?

(ii) Is there competition between hidden liquidity suppliers themselves?

(iii) How does hidden supply react to ”hidden order detection strategies”?

The authors end up demonstrating the predictability of hidden order flow, but that is not what really draws our attention to the study. What draws our attention is that NASDAQ provides that data on their feeds for this to be done. According to the authors, while this information can not be inferred on the NYSE, it can on NASDAQ Total View:

It is in the nature of things, that information on hidden order placements is not provided by an exchange. Therefore, from classical transaction data sets, as, e.g., the Trade and Quote (TAQ) database released by the New York Stock Exchange (NYSE), it is impossible to infer on hidden orders. This difficulty is the major reason for the lacking empirical evidence on hidden order placements.

Message data, as provided by TotalView, however, contain information on any activities affecting the visible part of the LOB. In particular, it specifically reports executions against hidden orders which allow us to identify the exact position of hidden depth in the LOB. As illustrated below, these details can be utilized to conduct statistical inference on undisclosed order submissions.

So while NASDAQ continues to place the interests of one group of market participants over other groups, and while they claim that they do nothing wrong and that nobody uses their data to look for hidden orders of other participants, this study proves otherwise.

Roger Waters also explained the line, “See you on the dark side of the moon” as follows, and it is reflects our feelings about the de-evolution of our market structure as well:

‘I know you have these bad feelings and impulses because I do too, and one of the ways I can make direct contact with you is to share with you the fact that I feel bad sometimes.”