4 ms·

On the one hand, I’m outraged that these fraudulent practices are being so lightly punished. I wonder if the author of the article actually understands what th

On the one hand, I’m outraged that these fraudulent practices are being so lightly punished. I wonder if the author of the article actually understands what the SEC fined this "dark pool exchange" firm for doing. Dark pools are a growing part of the trading world and are legal but they do not disclose the identity of buyers and sellers. Quotes on securities are not displayed to the public, as they are with major mainstream stock exchanges like the New York Stock Exchange. Participants in dark pools have access to trades that other investors in public exchanges do not The SEC fine was for "allowing" a dark pool to be not-so-dark. She seems to be arguing that the fine should be higher, which would mean firms would have an incentive to go "darker". Dark pools are bad for markets. Allowing a select few (the wealthiest select few? why are they pooling in the dark?) to "collude" and thus have significant impact on the price of a security can hurt the ability of other investors to extract their fair value. Why is the general public being excluded from these trades that affect the FMV (Fair Market Value), and more importantly, does this pooling actually hurt FMV? Maybe dark pools should be illegal. In which case a small fine here makes sense. But what probably happened is that when this dark pool firm leaked the identities / trades of some of its insiders, those insiders freaked out. And now these dark pool exchange firms have been poked in the direction to "stay dark". So where are the incentives to make dark trading more light? Can we invent some? The SEC could reward firms that make colluding dark-pool firms more transparent. I'm sure there's something in the mission statement of the SEC (http://www.sec.gov/about/whatwedo.shtml http://www.sec.gov/about/whatwedo.shtml) that would justify the need for fairness to aid in potential linkage of insider trading of securities that for whatever reason aren't public. [edited for typos and content]

niggler 14y ago
Dark pools are bad for the exchange operators of public exchanges (like NYSE and NASDAQ) but it's far from obvious that they are bad for the financial industry. There are certain advantages: for example, even now, all it takes is $50-100K to whip the price of certain public companies like Alcoa (AA), a Dow 30 component. I have rocked the boat many times, and the fact that most small traders can do the same doesn't bode well for the markets. The dark pools do allow for large transactions without affecting the price too much, keeping some sense of order (as vacuous as that sounds). It's important in these discussions to understand that the various companies take sides based on their desired outcome. Other effects like insider trading are far more disconcerting than the issues claimed in this case.
- beagle3 14y ago
  > The dark pools do allow for large transactions without affecting the price too much, keeping some sense of order (as vacuous as that sounds). Another way to read your statement: "The dark pools allow the inherently unstable and fragile market to appear more robust than it is". Which, I think, is a bad thing for society. Because a fragile market will break, sooner or later, and it's better if the fragility is visible so that players can actually evaluate their risks.
yummyfajitas 14y ago
Dark pools are not limited to the "select few". More or less anyone can use a dark pool - Interactive Brokers, for example, lets you access several. I don't know if they still do, but at one time both ETrade and Ameritrade ran a dark pool for their customers. (They call it internal matching, but it's basically the same thing.)
- shawnee_ 14y ago
  OK, maybe clarification is needed. Dark pools benefit the select few more than they benefit the small-time traders. Theoretically the small-time traders can't have significant (enough) impact on the price of a security. But those "select few" who control the bulk of the pool get to throw their weight around without any of the scrutiny that comes with public trading on the public market. Also, dark pools make it much easier for insiders to do insider trading, whether at volume or not.
  - yummyfajitas 14y ago
    How does submitting anonymized orders to a darkpool help insider trading relative to submitting anonymized orders to a public matching engine? You are correct that dark pools (in principal) benefit institutional investors over predatory HFT's and retail investors, by making it easier to move big blocks without immediate price impact.
    - shawnee_ 14y ago
      Inside traders who submit large blocks via darkpool reduce their chances of getting caught. If enough insiders collude and decide to anonymously, but simultaneously act on a certain company via darkpool trading, the chances of getting caught are further reduced. (Mapping patterns among public info is presumably much easier than mapping patterns among cloaked private info). What is interesting and kind of baffling is that this fine was waged at all, in light (cough) of the supposed goal of the SEC to "strengthen regulation of dark pools" proposed back in 2009: http://www.sec.gov/news/press/2009/2009-223-fs.htm http://www.sec.gov/news/press/2009/2009-223-fs.htm I would be willing to bet that dark pool trading, which tripled in volume between 2002 - 2009 has probably 10Xed between 2002 and 2012, and might even be one of the underlying causes of the much hyped meltdown of the markets right around that time.

niggler 14y ago

Dark pools are bad for the exchange operators of public exchanges (like NYSE and NASDAQ) but it's far from obvious that they are bad for the financial industry. There are certain advantages: for example, even now, all it takes is $50-100K to whip the price of certain public companies like Alcoa (AA), a Dow 30 component. I have rocked the boat many times, and the fact that most small traders can do the same doesn't bode well for the markets. The dark pools do allow for large transactions without affecting the price too much, keeping some sense of order (as vacuous as that sounds). It's important in these discussions to understand that the various companies take sides based on their desired outcome. Other effects like insider trading are far more disconcerting than the issues claimed in this case.

beagle3 14y ago
> The dark pools do allow for large transactions without affecting the price too much, keeping some sense of order (as vacuous as that sounds). Another way to read your statement: "The dark pools allow the inherently unstable and fragile market to appear more robust than it is". Which, I think, is a bad thing for society. Because a fragile market will break, sooner or later, and it's better if the fragility is visible so that players can actually evaluate their risks.

yummyfajitas 14y ago

Dark pools are not limited to the "select few". More or less anyone can use a dark pool - Interactive Brokers, for example, lets you access several. I don't know if they still do, but at one time both ETrade and Ameritrade ran a dark pool for their customers. (They call it internal matching, but it's basically the same thing.)

shawnee_ 14y ago
OK, maybe clarification is needed. Dark pools benefit the select few more than they benefit the small-time traders. Theoretically the small-time traders can't have significant (enough) impact on the price of a security. But those "select few" who control the bulk of the pool get to throw their weight around without any of the scrutiny that comes with public trading on the public market. Also, dark pools make it much easier for insiders to do insider trading, whether at volume or not.
- yummyfajitas 14y ago
  How does submitting anonymized orders to a darkpool help insider trading relative to submitting anonymized orders to a public matching engine? You are correct that dark pools (in principal) benefit institutional investors over predatory HFT's and retail investors, by making it easier to move big blocks without immediate price impact.
  - shawnee_ 14y ago
    Inside traders who submit large blocks via darkpool reduce their chances of getting caught. If enough insiders collude and decide to anonymously, but simultaneously act on a certain company via darkpool trading, the chances of getting caught are further reduced. (Mapping patterns among public info is presumably much easier than mapping patterns among cloaked private info). What is interesting and kind of baffling is that this fine was waged at all, in light (cough) of the supposed goal of the SEC to "strengthen regulation of dark pools" proposed back in 2009: http://www.sec.gov/news/press/2009/2009-223-fs.htm http://www.sec.gov/news/press/2009/2009-223-fs.htm I would be willing to bet that dark pool trading, which tripled in volume between 2002 - 2009 has probably 10Xed between 2002 and 2012, and might even be one of the underlying causes of the much hyped meltdown of the markets right around that time.