Tired of Dining With The Salahis?

Obama State Dinner Uninvited Guests

Do remember the Salahis? They were a couple, also known as the White House Party Crashers, who without invitation would sneak their way into high profile events, including White House State dinners. They were unwanted, disruptive, and brought nothing to the table – figuratively and literally. They were very much like the unwanted intermediation forced upon willing buyers and sellers in our equity markets, courtesy of a complexity that we are confident even the architects of our modern market structure would not understand.

In the recent past, we have been trading one mid cap name for a client of ours. The amount of unwanted/unneeded intermediation was shocking. Trading this name has been challenging and disheartening simultaneously:

Placing offers on the public markets through broker SORs would result in stock trades taking place at our offer, and around our offer, although not our fills, as well as penny jumping.

 Although we would create the new NBO, we almost never received any executions at the NBO we created through the SOR – those would take place in dark pools on the offer, in internalization engines that were supposedly retail, or in places and TRFs where we couldn’t even ascertain who was trading it and how. But the trading would start and stop only when this one SOR set an NBO.

In the majority of the time, our new NBO was penny jumped by a program, until we canceled, in which case the penny jumper canceled as well. Stock that was shorted ahead of us by the penny jumper mysteriously printed at our NBO setting price once we canceled.


Placing offers on the public markets through our own pipes would also spur trading in the name with fills not accruing to us, but less egregiously so compared to our experience with the SORs.

While dark pools were effective in trading with the very obvious other side, we continually had to tweak our interaction on the fly.

For example, we knew a buyer was in BIDS. We would then enter a sell order directly in BIDS and get NO EXECUTION. Yet when we entered our sell order in an aggregator that passed through BIDS, we would get the fills. Know your dark pool engine matching priority!

Many times, despite our eliminating of several destinations, and besides controlling our minimum fill size, entering a sell order in one of the dark aggregators we use would trigger adverse stock reaction (quoting and trading), which would revert once we canceled.

We also noticed patterns – for example every time there was a dark pool buyer (aggregating in several pools), one exchange, BATS, would go lone offer and tick the stock lower, with no stock trading at that exchange. The dark pools buyer would buy stock until they were satiated, at which point the exchange offer would cancel and the stock would pop a dime. It certainly appeared that the exchange offer had no intention to trade – it was used solely to manipulate the stock price lower, so that it could be bought through other destinations.

When they buyer and us did match on beefy fills in the stock, our respective “routes” would change, so that both of us entering the same follow on orders would amazingly cease giving each of us our desired executions. It was as if the intermediaries realized that we had found a way to cleanly connect, and then adjusted to get in between us immediately.


We know you all have trading war stories, and understand what we are talking about. It should have been much easier to match up with the willing other side in this name, yet we and the buyer on the other side had to dance through a plethora of methods and techniques, with considerable effort, in order to simply trade together willingly. They wanted to buy. We wanted to sell.

The amount of forced intermediation was shocking, and it was impeding the exchange of capital and risk, and not facilitating it. It was  adversely affecting transaction costs, as each source of intermediation created new leakage to high speed short term trading models.

Defenders of the complexity call it choice and competition. They use buzzwords and platitudes that distract the public, and the regulators, from what is really going on.

We challenge our regulators to actually sit on execution desks and witness firsthand the forced intermediation and execution complexity we describe, understand the abandonment of time-price priority, understand the opacity in which investor orders are forced to interact, and see what it actually is like to have dinner with the Salahis.


Bon Appetit Washington.