Imagine if i could find a hedge fund manager, but no skin in the game, to actually explain how this whole game works, how the market makers are terrified from the amca movement and how dark pools were created and are being used. Imagine if we could get one good hedge fund manager to actually come up and say the truth. Well in this video we're gon na do exactly that. They think of retail traders as sort of random right in that someone's buying someone selling for whatever reason, but they tend not to come in and buy, buy, buy for a whole week and just run you over now.

What's happened recently with amc and gamestop, and just with kind of the the changes that have occurred in markets, just the rise of the retail trader um is that retail traders are kind of deciding together, they're sort of coming up with ideas on message. Boards and they're they're all going to the market. So suddenly you know robin hood that used to feed these guys. This nice random order flow where one guy's, a buyer, one guy's a seller, and you just get to make you you get to introduce them and make money right suddenly.

Now they all turn up and they're all buyers, and you guys are, ah you know so now. They're getting run over by the retail trade, they basically saw that retail investors were getting screwed by the nicey specialists and by the nasdaq market makers, and so these guys were licensed as brokers and they kind of were doing some brokerage business. But then they just decided to start trading for their own account using this software, which you weren't really supposed. In fact, you definitely weren't supposed to do market makers realizing.

You know they've been screwed over 50 times a day by the day, tech guys and they come storming across the road into the office and like attack a guy at his desk. You know i mean it was. You know it was pretty crazy. All of the big kind of smart quant stock traders got involved in this stuff and what you know - people like bernie madoff, in fact, were also.

You know they were the first uh market maker to pay for order flow, and that was that was a big deal at the time and that's sort of the problem we're seeing today, but one of the things that's interesting is possibly eventually the elimination of middlemen. You know that that kind of might mean that uh that traders can face each other using some sort of technology that you know is self-funding. I got to sit down with patrick boyle, one of my favorite all-time finance youtubers, but he's also a hedge fund, founder and manager, palomar also a published author. Many many many many publications about finance and he's also a finance professor at king's college in london he's definitely a qualified guy with a lot of hands-on experience actually founding and managing hedge funds, there's literally nothing.

He doesn't know about finance specifically about some of the stuff that are floating around around this whole amc argument, so we got to talk about dark pools. We got to talk about why the ape movement is changing the rules of the game and actually hurting market makers and hedge funds. This is a fascinating conversation. I ask of you to come in with an open mind because patrick isn't against us he's actually here to shed some light.

He's, definitely not nape, but he's an objective bystander. Giving you a lot of important information so take it at par value, and also don't forget to do your own research, because, like everything we do on this channel is just my opinion and patrick's opinion, which means it always might be wrong might be. Inaccurate might be even the ramblings of a madman or multiple madman. Who knows you still got ta.

Do it on research, but i think it's a great opportunity to hear from an actual hedge fund insider how dark pools work, how market makers work, how this whole game has changed because of the ape movement? Actually, a lot of surprising stuff. I didn't even figure out about now. Let's get started and i hope you enjoyed this video. You know the existence of dark pools and uh all of this uh.

What can i say, sort of non-exchange trading um is something that kind of came around in the late 1990s. Initially, what would have happened? You know, and actually i made a video it just touches on it, but there's one of my old videos called, like i think, day trading in the 90s or something like that sort of talks about how these guys came about. But basically there was this old approach. Where kind of there were the big market makers like big sort of investment bank type firms that made markets in all of the nasdaq stocks.

And then there was the new york stock exchange and what happened was that a bunch of kind of smart, techy.com type guys came up with ideas? They basically saw that retail investors were getting screwed by the nicey specialists and by the nasdaq market makers, and they worked out ways around it. You know - and this was even this is kind of where the day trader came from, because these guys, basically there was a piece of software - it's still kind of around called nasdaq level. Two, and if you were a market maker, you had to register as a market maker and you were allowed to use nasdaq level two which showed you the full order book and allowed you to trade in certain ways. And so these guys were licensed as brokers.

And they kind of were doing some brokerage business, but then they just decided to start trading for their own account using this software, which you weren't really supposed. In fact, you definitely weren't supposed to do and they even had some funny things where they would. You know because there was supposed to be a customer behind each order. They would kind of get a bunch of friends and family to invest some money with them and they'd do these trades kind of for their own account, but they sort of put it in this friends and family customer account.

It was really skirting the lawn they did get in trouble for this, but they basically worked out that using the software that the market makers had they were able to take advantage of the market makers and they were able to do all sorts of things um, because How it worked was, usually all of the trades were done over the phone, but nasdaq did require market makers to put a certain number of they had to make a market electronically between themselves for a small number of shares, and so these guys would see the stale Pricing use their software to grab that stale price and basically run it up in the face of these market makers and the market makers, hated them and there's stories of the mark. You know a lot of them like day. Tech was the big firm that then went on to be daytech the brokerage but there's stories of um market makers realizing. You know they've been screwed over 50 times a day by the day, tech guys and they come storming across the road into the office and like attack a guy at his desk.

You know i mean it was. You know it was pretty crazy. He basically built an entire exchange off the exchange because he wanted to be able to with their firm date, which which had a then a day, tech online, which was a retail brokerage. They were able to just cross people's orders in the pool right and if they could cross people's orders, they could give them much better fills than they could get by going to nasdaq.

Now, as you can imagine, the guys at nasdaq went insane over this and there was all such illegal, wranglings and whatever, but this was sort of the first of the dark pools and there was archipelagos which was just you know, almost a spin-off on the name uh Island, which was the original exchange, and so they set up these sort of off off market exchanges, basically to give better pricing to themselves and to retail customers, and so that's where this kind of um off exchange trading came from and it did actually improve the markets. Quite a lot, but then, of course, there's always problems because we're adding complexity on top of complexity. So it moved to a point where there's like 20 or 30 different places, you could trade right, which is complicated and then all of the market makers and all of the the um brokerages are the the off-market exchanges basically wanted to attract people to their exchanges and In particular, you know there were certain types of customer, they wanted more than others, and so they they came up with these things. You know they wanted liquidity right, because if you start a new off-market exchange, the problem is: if someone comes to buy there and there's no one they're selling, you don't really have much of an exchange, the classic network effects of uh, exactly yeah, and so they came Up with this idea of having uh, you know - and this is sort of one of the big disasters i think that happened, but on a bit of a whim, i think it was uh.

The this guy levine at ireland came up with this idea that um that that you could have maker and taker that if someone provided liquidity, they would get a rebate from the exchange and, if you sort of reached across the spread to either buy or reach the Crust to spread to sell that so it was sort of you were either a maker of liquidity or a taker of liquidity, and so one would pay a fee to the other more complexity. You know which didn't work out to be good and it kind of goes on and on, but all of the big kind of smart quant stock traders got involved in this stuff. And, what's you know, people like bernie madoff, in fact were also. You know they were the first uh market maker to pay for order flow, and that was that was a big deal at the time and that's sort of the problem we're seeing today uh in markets - and the question is you know: is that reasonable or not? Now the thing that's kind of complicated about this is that: how does this work like? Who is hurt and who is not now? The truth is that these market makers or these pools they want to pay for retail order flow.

Okay, now you might say why would why do they want to separate retail from institutional and at first your idea might be well, it's it's to rip off the small guy right, but, interestingly enough market makers, they have kind of an interesting business right because you basically Register as a market maker and you're able to trade there with the the flow of orders that comes into the market and you put up two prices, the price that you'll buy it and the price that you'll sell at and your goal like the perfect things. If the market goes sideways all day, long and you're buying it one person at another price, making money all day long. What goes wrong, though this is a bit of a pennies in front of a bulldozer problem. Is that once in a while, someone will come in and buy from you, and so you sell it to them, they'll buy again, you sell it to them again now: you're short, okay, they buy again now you're getting shorter.

Now you're, like oh, you know. Now now you have to buy right so then you kind of you back off on any offers to sell and you just start crossing the spread yourself in order to buy because you just want to get flat right so what they hate. What market makers hate is someone who will come in and do that right because they they get caught either short or they get caught along when a big move happens in the market? Now they worked out that the people who were definitely doing this to them were big traders right like if fidelity comes in and fidelity will say on a monday morning to some you know, comes in and they're buying an apple stock might take fidelity a week to Get a fill in apple and they're gon na buy, buy, buy, buy and if you're a market maker you're getting hammered by this, because you you just you have to participate. But when you participate, they just hit you again and again, and not only that all you back away on one side, all of the other market makers are kind of backing and that's actually kind of how markets move up or down, but it's unpleasant if you're a Market maker, so they wanted to separate these people because they think of retail traders as sort of random right in that someone's buying someone selling for whatever reason.

But they tend not to come in and buy, buy, buy for a whole week and just run you over, and so they actually give better fills, at least in theory. This is the idea behind it, and this is what they'll tell you and it seems reasonable to me. They'll, give better fills they'll they'll, be more aggressive to get retail order flow. Simply because, wouldn't god be a buyer, one will be a seller and you can deal with them all day long and grind out this profit.

But they really hate dealing with kind of the big guys who run over them. And so they want them in separate pools and so citadel will pay robin hood to send stuff their way because that's random and they can make money in that. But they'll try to avoid you know they don't want, like george soros in there, like you, know, running them flat right, so they want to separate them now. What's happened recently with amc and gamestop and just with kind of the the changes that have occurred in markets.

Just the rise of the retail trader um is that retail traders are kind of deciding together, they're sort of coming up with ideas on message, boards and they're they're all going to the market. So suddenly you know robin hood uh that used to feed these guys. This nice random order flow where one guy's, a buyer, one guy's a seller and you just get to make you get to introduce them and make money right suddenly. Now they all turn up and they're all buyers, and these guys are, ah you know so now they're getting run over by the retail traders.

So this is kind of this is sort of where we are with this, and it's something that you know we'll see over time. Like market structure always changes because it's kind of uh like an evolutionary process, it doesn't necessarily mean it always changes for the better, but it always moves such that such that people can survive right, because if the market makers get hammered, the market makers go away. Market. Doesn't really function, but one of the things that's interesting is possibly eventually the elimination of middlemen.

You know that that kind of might mean that that traders can face each other using some sort of technology. That you know is self-funding, but you know we have to see like it, but it's um right now. I think you know i. I guess that's probably my 20-minute answer to a question of.

Can i explain dark pulse, so you just heard it from an insider in the hedge fund industry. How dark pools operate? How market makers are terrified from the ape movement? These are fascinating stuff. If you want me to ask more questions from patrick and bring it back on reach out to me on social media at, i, am tom nash probably best on twitter, but you can get me on instagram as well reach out to me. Send me a question.

Let me know if you want me to bring patrick on again and i'll do my best. Usually he accommodates so, let's see what happens as always a huge shout out for the channel members and the patrons for making this happen. Thank you. So much we'll see you guys in the next video.