Re: Strong words
Brad seems to be zeroing in on the methodology of manipulating the order book by allowing cancelations simultaneously with an order. So he says that the dark pools and internalized orders have an advantage because they can post an order and then cancel it when an offer comes in but beofre the offer executes. That's the 350 ms gap.
The whole issue is really no different than the fat spreads that used to be the OTC market now NASDAQ. Along came the daytraders like Harvey Houtkin with faster execution on an ATS that allowed them to pick off orders in between the bid and offer. In those days, folks like Madoff, Herzog, Fidelity, GS, Lehman.... were running market maker books with spreads of 1/4 to a half in cases. The market makers, NASDAQ brokers of the day were crazy up the walls about campaigning that the day traders were ruining the business and should be banned from participating in the OTC market.
Today, it's a little different because the HFT firms are exploiting a subtle difference between the rules of operation for certain institutions using dark pools for example and the individual investor. First there is the ability to cancel more rapidly, therefore creating what Brad says is an artificial book. Secondly, they have the ability to enter orders on both sides of the book using a 350 ms programmed simultaneous order to call and put and cancel in two different accounts for the same options contract. This allows them to create an artifical book, and also to act upon new orders against that artifical book with a 350ms edge. I think this is what Brad is saying.