[nairboon]

Although the above example was missing some details, I suspected it was meant to illustrate the following effect: The public last price was $5, so bid/ask will be around that price let's say 4.99/5.01, if you buy with a market order you'd pay approximately $5 ($5.01). But if there is a new large sell order for 5 million shares at 5.05, then the market would react to this information and adjust bids & asks. For illustrative purposes it could be possible (if the 5 million order is rather large in comparison), that the new bid/ask would be 4.89/4.91 and you'd get your shares for around $4.9.

[roenxi]

That is irrational. It suggests every time someone sees a market price at $5 they could put in an enormous fake sell order for shares at $5.05 to buy shares at $4.90 then cancel the fake order, which makes no sense. "The market" is giving away freebies in an insane way.

If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.

[hattmall]

>If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.

Except that the market is all game theory. If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.

I design some financial software and the best way to think about it is to abstract away the idea of money and numbers. Think of it as a maze and every stock and price point combination is a doorway.

Normally a door, when you open it, you can see down the hallway to how long the next door is without actually entering the hallway. (In the stock market this is called Level II data) the impact of dark pools is that when you open a door you can't see how long it is. Except that it looks like every other hallway with a defined length, but you don't know that it is a hallway that keeps going for an undetermined amount of time. There's no way to figure out the length without entering the hallway and going as far as you can until you either reach the end or become exhausted (Not a great way to solve a maze).

Without access to the dark pool the best you can do is enter the hallway and figure out it doesn't behave as expected and move away from it.

It's a significant advantage when you are playing against other people to see the complete picture of the maze at any given time. There are entire teams of PhDs working to decode the positions of dark pools they don't have access to by analyzing option data.

[roenxi]

> If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.

Your basic argument there seems is "new information can cause the price to move at random". And I accept that. But it doesn't matter to anyone on the lit market because the trades on the dark market would help or hinder them at random if they were publicised. If there isn't a systemic bias then it is just noise, I have a choice between the price on the lit market or ... the price on the lit market plus some random variable that might be positive or negative. It doesn't change how much money I expect to make. I'm not at any sort of disadvantage.

It doesn't change my ability to value my trades and it doesn't cause me to think I'm going to be better or worse off. We already know that distinct market participants have different knowledge and world models. There isn't anything here that it is useful to adjust.

> Think of it as a maze and every stock and price point combination is a doorway.

This explanation literally makes no sense to me; I don't see how it matters. Someone offers to buy at $X/sell at $Y. Someone else chooses to take the other side of the trade or not. It is only that weirdly complex if you want it to be.

If you need omniscient knowledge of the market structure to value a good then it isn't possible to trade it because your knowledge is always lacking information that is relevant to valuations. For example, you can't know about orders that are about to be lodged in the immediate future. We all have to operate with the understanding that some other market participants know things we don't and value things differently. It doesn't make the trading environment unfair.

You seem to have a traders perspective here where you want to turn a turn an asymmetry of nearly irrelevant information into profit. I'm cool with that, but I don't care if it works or not. It sounds like a zero-sum game, someone is going to lose. and I don't see why I should be phased about who or why. I just want the market to offer to buy/sell things at a fair price. Dark pools don't seem to influence that in any way, the incentives mean that the price signalling should be basically honest.

[infecto]

Why would volume outside of the NBBO force price down? I think you are also over weighting order book impact to price. There is definitely some information there but with its not always that meaningful.

[sfn42]

Why would lots of shares available at 5.05 cause others to sell shares for 4.90?

[hattmall]

Because you want to move ahead of the 5.05 seller and be sure your shares can sell for $4.90. If the $5.05 seller is trying to sell 5 million, but it's taking a long time. They might drop down to $4.85 or something. It's all game theory and predicting what others will do. A big part of that is having all of the information.