Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16
Unintended Consequences, Part 1: Easy Money = Overcapacity = Deflation - 19th May 16
The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - 19th May 16
Stock Market Final Supports Are Broken - 19th May 16
Gold - Pro-Inflation? Anti-USD? - 19th May 16
Further Stock Market Uncertainty As Indexes Gained On Friday, Will Uptrend Resume? - 19th May 16
What This U.S. Presidential Election Tells Us About Her Millennial Generation - 18th May 16
Stock Market Trendline Broken on Fed Announcement - 18th May 16
An Incredibly Simple, Rarely Used Way to Book 170% Investing Gains - 18th May 16
Statistically Significant Stock Market Death Cross? - 18th May 16
Precisely Wrong on US Dollar, Gold? - 18th May 16
What You Can Gain From One Tech CEO's $355 Million Loss - 18th May 16
The ‘Tide’ has turned… NEGATIVE For STOCKS!!! - 18th May 16
Goldman Sachs's - Regulatory Climate is Chilling Deals; Hatzius Not Worried About a Recession - 18th May 16
Bitcoin Price Remains above $450 - 18th May 16
Crude Oil Price Trend Forecast 2016 Implications for Stock Market - 17 May 16
Could the National Debt Really Grow as High as $31 Trillion by 2023? - 17 May 16
Gold Price Possible $200 Rally - 17 May 16
Crisis Investing - Jim Rogers on “Buying Panic” - 17 May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

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

© 2005-2016 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

Catching a Falling Financial Knife