Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14
Will Canadian Regulators be Able to Avoid Final Fatal TSX Venture Exchange (TSX-V) Crash? - 25th Aug 14
HUI Gold Mining Stocks Elliott Wave Projection - 25th Aug 14
Stock Market Uncertainty Resolved With New High - 25th Aug 14
Go Forth Multiply And Replenish The Earth - 25th Aug 14
Dollar Dumping: When Actions Speak Loudest - 25th Aug 14
A Plethora of Currency, Stocks and Precious Metals Chartology - 25th Aug 14
Why Isn’t Fed Monetary Pumping Helping the U.S. Economy? - 25th Aug 14
Myths About Money and Inflation - 25th Aug 14
The Fed Will Raise U.S. Interest Rates in March 2015 - 25th Aug 14
Gold Price Manipulation Still Alive - 25th Aug 14
The Ebola Outbreak: U.S. Sponsored Bioterror? - 24th Aug 14
Instigating War in Europe - Understanding Ukraine in 15 Minutes - 24th Aug 14
LNG Catalysts About to Hand You the investment Opportunity of the Decade - 24th Aug 14
Another Interesting Stock Market Juncture - 24th Aug 14
The West Set Up the ISIS Endgame - 24th Aug 14
Gold And Silver Low Prices Are NOT The Reason To Own Precious Metals - 24th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

Are Dark Pools Destined to be the Next Financial Black Hole?

Stock-Markets / Market Manipulation Jul 10, 2008 - 09:35 AM GMT

By: Keith_Fitz-Gerald

Stock-Markets

Best Financial Markets Analysis ArticleWe can almost hear that ominous " Jaws " theme music in the background and can see that huge dorsal fin as it slices threateningly through the water - knowing full well that the real terror is hidden beneath the water's surface.

But this time around, it's not a "Great White" that's sparking our fears; it's a well-capitalized and broadly based series of secret stock exchanges known as " Dark Pools of Liquidity ," "Dark Liquidity," or just "Dark Pools."


Most investors have never even heard the term - and are truly shocked to discover these "off-the-books" trading networks actually exist.

But to Wall Street insiders looking to anonymously move billions of dollars in stocks, bonds, and other investment instruments, dark pools are de rigueur - especiallywhen you're an institutional trader who doesn't want to reveal your intentions or your actions to the "rest" of the market, until after the fact when the orders are "printed."

And that makes these dark pools of capital highly problematic when it comes transparency: There is literally none in most pools and only limited visibility in others.

Dark Pools: From Trading Haven to Heavyweight

Dark Pools are electronic " crossing networks " that offer institutional investors many of the same benefits associated with making trades on the stock exchanges' public limit order books - without tipping their hands to others, meaning publicly quoted prices aren't affected. This is the capital markets' version of a godsend - especially for traders who desire to move large blocks of shares without the public investors ever knowing.

Some examples of so-called crossing networks include Liquidnet Inc. , Pipeline , the Posit unit of Investment Technology Group ( ITG ), or the SIGMA X unit of Goldman Sachs Group Inc. ( GS ).

In an era in which "secret" transactions contributed to what's shaping up to be the largest credit crisis in history, you'd think that any mechanism that allows insiders to trade in complete secrecy and with total anonymity would be scrutinized more closely than a Roger Clemens vitamin shot . But that's not the case with Dark Pools.

As has long been the case, the old boys really do like to operate behind closed doors, on the other side of the "velvet rope" - beyond which the un-anointed daily working stiff may never pass. And Dark-Pool operators are only getting more private as computerized trading becomes more sophisticated and large-scale-order placement evolves into a science all to itself.

Dark Pool ownership involves almost the entire institutional-trading sector, consisting of independents, broker/dealer-owned pools, consortiums and even - as hard as this is to imagine, given the public's trust - the stock exchanges themselves (See accompanying chart).

And business is booming.

According to the latest data, nearly 12% of daily U.S. stock-trading volume is presently conducted via the 40 or so Dark Pools operated by the " usual suspects ."

According to The Wall Street Journal , Credit Suisse Group AG (ADR: CS ) is assembling a network of 30 Dark Pool partners, while JP Morgan Chase & Co. ( JPM ) is trying to become the Google Inc. ( GOOG ) of the Dark Pool world by aligning itself with Neovest Inc . Not to be left out, Goldman Sachs recently struck reciprocal deals with rivals UBS AG ( UBS ) and Morgan Stanley ( MS ) to allow previously proprietary trading algorithms to work on each other's desktop trading systems.

This is something the stock exchanges don't want to see because it strips them of order execution revenue. Which is why they're getting into the game, too. At the present time, the Nasdaq ( NDAQ ) alone shunts some 18% of its volume - or roughly 350 million shares a day - through what insiders euphemistically refer to as its "non-displayed platforms," and also has struck a deal with five unnamed Dark Pool operators that are rumored to route nearly half of the total Dark-Pool volume in the United States today.

NYSE Euronext ( NYX ) plans to connect up to 30 such pools, so don't think for a New York minute that this isn't a global phenomenon - Dark Pools exist all around the globe.

We're still in the early days of this movement. That means there are still lots of things to be worked out from a technical standpoint. For instance, there's very little in the way of proprietary software that enables any Dark Pool operators to "talk" with their competition.

But we think that's going to change in a real hurry in the next few years, when as much as 50% of all U.S. trading volume will be handled by "Dark Pool Alliances."

Dark Pool Downers?

While it's hard to say just how this will affect individual investors like us, my experience as a professional trader suggests that there are a few "realities" we can count upon.

As you might expect, not all of them are good.

Let's look at the top three:

  • First, as more volume moves to the so-called Dark Pools, the very notion of what constitutes "public pricing" becomes suspect. Practically speaking, if we're seeing only 50% of the trading volume in a given stock, who's to say that the pricing we're seeing is accurate if the other half remains a mystery.
  • Second, the small- and mid-cap stocks that for so long have been the domain of smaller investors will likely become harder to trade. The reason: Dark Pools will absorb the liquidity that's presently out in the open, just as a " black hole " in outer space sucks in all the matter that's nearby. The net effect could be that smaller transactions become more inefficient, or that public pricing actually disconnects from private pricing. Either way, individual investors may not get the best possible prices.
  • Third, you can bet regulators will get interested if there is even a whiff of impropriety at the expense of smaller investors who perceive (and rightly so) that they are being "locked out" of the markets by the big boys yet again.

On the other hand, maybe those regulators don't care at all. With the economy going the way it is right now, there's plenty more to worry about… like making it out of the water and back up onto the beach before the music stops and "you-know-who" grabs you from below…… da-dun…da-dun….da-dun….da-dun .

News and Related Story Links :

By Keith Fitz-Gerald
Investment Director

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Keith Fitz-Gerald Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014