Who's money do you think they are managing?

I'm not sure how the answer to that question is relevant to the comment you're replying to.

Parent "Struggle[s] to feel bad for institutional investors" as if this was a class of whiney rich people who's money was under threat. It's not of course; it's mutual funds and pension money - our money.

Let me expand a bit: dark pools exist because of an asymmetry in the public markets caused by their fragmented structure. Those money mangers recognized that, so they sent flow to a place which was explicitly marketed as a tool to mitigate that asymmetry.

Contrary to the parent's post, transaction cost analysis is not an especially exact science and the tools available to fund managers are not particularly helpful or well-integrated. Their sell-side partners are not overly invested in helping them either, since they have their own issues (intense cost pressure, declining flow, regulators everywhere...)

No, that's a bit of spin you put on it. His point is that the people running money for the institutional investors are themselves highly sophisticated, and if a point so simple as "you need sell-side financial entities to make a stock trading exchange work" eluded them, there is a bigger problem than Barclays marketing; those firms are being run by incompetents.

Later

Sure! It's not controversial that Barclays marketing of the LX exchange was misleading. Nobody is sticking up for Barclays. But the important, subtle point is that the LX pool probably couldn't have worked the way Barclays claimed it could. It doesn't matter how they marketed it. Without market makers, with a collection of like-minded investors, it's hard to get action.

So it's not that Barclays was somehow corrupted by HFT traders. It's that they were trying to lead-to-gold alchemy to sophisticated clients, who should have known that Barclays can't turn lead into gold.

You are right, I responded to my interpretation.

That being said, the trading desks on the buy side are, for the most part, not very sophisticated at all. They are dealing with the same evaporating liquidity as the sell side, but they have far less ability to manage it. They are utterly reliant on the tools their brokers offer - tools which are generally very good (algos, and dark pools). In this case they are guilty of naivety perhaps, but it's nativity born of desperation. Barclays did directly say, "no predatory flow." At some point, even on the street, you have to believe direct statements made by your counter parties.

Later I'm enjoying this; I have to run to a meeting unfortunately. Sorry :)

The idea that the buy side is less sophisticated than the sell side (or the new breed of participant the HFTs) is plain false. Their whole value proposition (how they justify that 2 & 20 they charge) is that they are sophisticated players in the market that can deal with these complexities. For instance, I've written HFT software for a buy side firm.

To put this into prospective, there are single buy side firms that are bigger than the entire HFT market making industry.

2 & 20 is exclusively the preserve of hedge funds, an entirely different animal to large-scale institutional asset managers who make up the bulk of the buy side.

There's no arguing with the sophistication of the portfolio management side of institutional AM's - these are smart, well-compensated people with excellent tools and first-class support from their own companies and the street's research. Once you get to the buy side trading desk - the people responsible for implementing the decisions of the PMs, and the people who are dealing with this rapidly-changing, fragmented market - things become different.

You are right. It is "our" money. I just wonder why "we" aren't going to our mutual funds who even a small retail investor might pay thousands to every year and say, "what are you doing to proactively avoid these situations? are you taking the sell-side's marketing materials as truth, or are you doing your own analysis?"

If, as a retail investor, I could make only one call to complain, I would call my fund manager who has a _fidicuiary duty_ to me and demand an explanation.

(Note that no such fidicuiary duty exists between a sell-side broker and insititutional investor, which is why they had to use the Martin Act and there are no securities fraud charges.)

You say "our", but the bottom 50% do not own shares, in a pension fund or otherwise. Most of the money institutional investors are trading belongs to rich people.

(Who, you know, still have a right not to be ripped off)