Dark Pools - Anonymous Trading, Where is the regulatory outrage?

[WhiskeyGirl]

I keep watching the news, waiting for outrage from our Treasury, Federal Reserve, White House, community groups...

Where is the outrage about all the untrackable trades that are going on?  The anonymous trading? 

Martha Stewart went to jail for having and using insider knowledge.  How many of those secret trades are between people with insider knowledge? 

Who are these traders?  What is the worst thing that could happen if their trades were made public?

I keep expecting the Treasury, Federal Reserve, Congress, and White House to be outraged?  Why do they remain silent?

How will here ever be stability in our markets if all this trading goes on in the dark?

I keep thing about all the bank 'stress tests' that happened earlier this year.  Why?  It gave the government, and folks from the job rotation between the Federal Reserve, Wall Street, Treasury, and political appointees unusual access to the financial workings of corporations. 

There just seems to be to many conflicting interests in this group.

Where is the outrage about taxes that may be going unpaid?  Where is the outrage about potential insider trading?  Where is the outrage about market manipulation?

Why do all these folks remain silent?  Why are these trades done in secret?

jmho

[nonesuche]

Because the democrats are in power now and are profiting from it. their only outrage was that they weren't the insider traders profiting when Bush was in office, it was never about the common garden variety voter.

[WhiskeyGirl]

I keep hearing about liquidity, and saw a discussion on TV.  Here is one definition -

"The ability of an asset to be converted into cash quickly and without any price discount." 

related terms -

"liquid market - Market with a high degree of liquidity, often resulting from a large number of buyers and sellers."

http://www.investorwords.com/2837/liquidity.html

The thing that astounded me from the talking heads on TV?  You didn't actually have to have any 'fill in the blank commodity' to do the buying and selling.  Just buy and sell things you don't have.  For some reason, this is highly profitable.  It's been blamed by some for spiking the price of oil and food grains during the past twenty years.

That doesn't seem to be in the consumers best interest.  I would imagine, stable prices, reliable supply are in the best interest of consumers.

One talking person (no idea who this person is, my paraphrase) suggested that it would be ludicrous to expect traders to actully own the commodity.  He used oil as an example.  Can you IMAGINE a trader buying up oil and hoarding it?

How inconvenient...much easier to trade and make money on imaginary commodities.

Where would someone store all that oil?  It would require an investment in storage, shipping, transportation...not undertaken by many...I would imagine.  Much easier to buy and sell imaginary commodities.  At some point, REAL users end up paying for all this speculation. 

If you don't own something, why are you buying and selling?

Can you imagine going into McDonalds or Taco Bell, placing an order, and finding out when you pick up your order how much you owe?  From the time you placed the order, it was made, and delivered, traders/hedgers/speculators bought and sold your meal many times over, so that when you finally get to pay, the price goes from say $5 to $150?

People buying and selling a Happy Meal they don't own, and you get to pay for their profit of $145?

After seeing and doing a bit of research, I am inclined to believe the market does not need so much liquidity.  Liquidity seems to be a dodgy business.  I think consumers need long term stable pricing and supply.  Cut out the middle people - traders, hedgers, and speculators.  They seem to drive up the price, and supply - is that market manipulation? 

jmho

[WhiskeyGirl]

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

...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."

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.

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...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…

http://www.marketoracle.co.uk/Article5392.html

Market manipulation?  Is this the cause of the financial crisis last year?  Program trading gone wild?  Sucked the money right out of big banks and insurance companies?

[WhiskeyGirl]

Wall Street ripoff 2.0: High speed trading and deep, dark pools

On July 31, Senator Edward Kaufman (D - Del.) published a scathing letter online calling on the Securities Exchange Commission to make key rule changes. Titled "A Level Playing Field for Investors," the letter asked the SEC to end the practice of "flash orders" which allow large financial exchanges to preview large orders to a select group of paying customers. Kaufmann's letter also asked the SEC to force so-called "dark pools" to reveal their inner workings.

Dark pools are groupings of shares that allow large institutions to more easily trade amongst themselves and also to mask large volume trades from the broad market and prevent rapid swings in share prices. The letter minced no words, implicitly comparing the current Wall Street situation to the profound injustice of racial segregation.

Writes Kaufman:

"Regrettably, we now have an unfair playing field for investors. This leaves us with, in effect, two financial markets: one for powerful insiders, who use high-speed computers and privileged access to information to exploit loopholes for profit, and another for the average investor, who must play by the rules and whose orders are filled almost as an afterthought. This situation simply cannot continue. It is the financial equivalent of 'separate and unequal.' "

In response, the large exchanges and other actors in the HFT, flash order and dark pools arena are struggling to explain why it's OK for them to see exchange orders before anyone else. Their primary explanation is that they provide "liquidity." This means that having really huge companies quickly trading lots of orders for other people without the markets knowing the full extent actually ensures that everyone gets a better price...

A better price for who?  Insiders?

Didn't Martha Stewart go to jail for her insider information?  Are "Dark Pools" a kind of get out of don't go to jail free card?

However, many experienced Wall Street observers have offered another, darker explanation. They assert that high-speed trading platforms combined with split-second advance notice can make it very easy for sophisticated players to game the system. They can do this by issuing orders and then quickly canceling them, in order to probe for the maximum or minimum price a seller or buyer would accept for a given share.

Market manipulation?  Was dark trading part of the cause of the financial crash last year?

Where is the documentation for all those derivatives?  Maybe some were traded in secret?

Some got caught in their own web?

Flash orders let them execute these probes nearly instantaneously, so quickly that unsophisticated traders have no idea what happened. Then the HFT masters trade against these same unsuspecting traders to exploit the differential, usually one that is a matter of pennies, between the market price and the maximum that a seller or buyer is willing to accept. (I've personally spoken to traders at large banks who have witnessed this phenomenon underway). Collectively, this allows the HFT practitioners to reap huge profits a little bit at a time, all the while sucking just a bit more money out of the pockets of the slower moving critters on the Street.

Parasites?  What happened to long term investing?

read more here - http://www.dailyfinance.com/2009/08/01/wall-street-ripoff-2-0-high-speed-trading-and-deep-dark-pools/

Why isn't our government building financial firewalls to prevent yet another bubble and collapse?

Why just keep encouraging risky behavior that only benefits a few at large banks?

Why is the Obama administration continuing to privatize profits and socialize losses at these big companies?  Is it related to campaign contributions?  Is there a pattern?

Why aren't they proposing open books and new taxes on dark trading and HFT?  The wealth seems unlimited.

If American's don't like the taxes being proposed, what will the Global Government taxes look like?

Gee...Americans are the richest nation, they need to pay the most...

No jobs for Americans, no money for investment, no prosperity...oh, BTW, you get to pay the bulk of the GLOBAL TAX burden.

Something is wrong in America.  Our founders built fire walls to prevent abuse, corruptions, and dictatorship.  WTF happened?

jmho