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Dark Pools Refuse To Go Quietly Into That Dark Night

Tyler Durden's picture


As expected, dark pool operators have responded, getting concerned that after the recent escalation in the Flash trade scandal, they are the next natural target. And what surprise that their only retort, as per this WSJ article, is that they provide liquidity, and make stock trading cheaper. Right down to the generic script. At least they haven't used the mutual assured destruction defense clause quite yet.

Geoffrey Rogow at the Wall Street Journal reports:

Several dark-pool executives told Dow Jones Newswires that Mr.
Greifeld's far-reaching proposal would have calamitous effects for
retail and institutional traders.

"Undisplayed liquidity adds to execution quality," said Bob Gasser, chief executive of Investment Technology Group
Inc., which is credited with creating the first of the modern-day dark
pools roughly 20 years ago. "You can come up with all kinds of
anecdotes, but the simple fact is, on behalf of all investors, dark
liquidity adds to execution."

Other alternative-trading system executives called Mr. Greifeld's
stance on the issue opportunistic given lawmakers' recent focus on
related issues, and suggested that Nasdaq OMX is acting defensively
after losing market share to non-displayed trading venues.

And here is where the prisoner's dilemma gets interesting:

Several dark pool officials also noted that both Nasdaq OMX and NYSE Euronext, which has also been losing market share, maintain non-displayed liquidity pools.

But as the NYSE has publicly disclosed, the SLP - that most questionable of recent NYSE liquidity programs has no advance look characteristics. So Zero Hedge assumes that the dark pool operators, in a preamble to full out exchange war are referring to some else. Zero Hedge would be quite curious to understand what that is, especially since the NYSE has been a vocal opponent of non-displayed liquidity.

Furthermore, as Ray Pellecchia disclosed to Zero Hedge recently, "we're not aware of a way to re-route flash data from another market to the NYSE. To the extent that anyone sees flash data it would be in the context of their being a member of another (non-NYSE) market, and any resulting trades would take place there."

And some more tidbits from the WSJ:

As dark pools have grown -- accounting for more than 7% of all trades in June, according to Rosenblatt Securities -- the SEC has made it clear it is evaluating these alternative trading systems, indicating more regulation is likely.

In interviews with nearly a dozen dark-pool executives, none objected to the SEC's initiative. Dark-pool administrators are willing to provide more transparency and standardize volume reporting, with most even demanding it.

But Mr. Greifeld's letter this week went a step further, calling for the elimination of "market structure policies that do not contribute to public price formation and market transparency." The Nasdaq OMX chief tied dark pools to the issue of flash order types, a trading practice in which stock trades, after being checked against an exchange's order book, are sent to a select group of participants before being routed to other exchanges for filling.


"I understand when there's a duopoly, you want to maintain that, because it's a good business model," said Seth Merrin, founder and CEO of Liquidnet, among the largest independent dark pools. "But it's really detrimental to all the people who invest in pension funds or mutual funds, and people who manage institutional order flow."

As Zero Hedge has demonstrated, there is much confusion over what really occurs within the confines of dark pools. However, as even CEOs of various ECNs are beginning to acknowledge there is a two-tier model within exchanges (either currently or in progression). One can take the argument further by simple arithmetic and realize that within this duopoly system, Goldman is an explicit monopolist. And whether or not it is to the benefit or investors to maintain a monopoly (or even a duopoly) is really an anti-trust question.

Thus, Zero Hedge yet again implores Christine Varney to seriously analyze the implications of a firm such as Goldman Sachs monopolizing order flow not only on open exchanges such as the NYSE but in dark liquidity pools via SIGMA X.


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Fri, 07/31/2009 - 17:13 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

On the weekends, Goldman Sachs employees kill puppies with claw hammers.

Fri, 07/31/2009 - 17:23 | Link to Comment SWRichmond
SWRichmond's picture


"...into that GOOD night..."

Fri, 07/31/2009 - 17:28 | Link to Comment Tyler Durden
Tyler Durden's picture

I don't think Dylan Thomas would be a fan of HFT

Fri, 07/31/2009 - 17:40 | Link to Comment deadhead
deadhead's picture

I just noted the quote of Ray P. that you incorporated into your post...would this be an answer to your previous question about GS having flash info and utilizing on the NYSE?

Fri, 07/31/2009 - 17:50 | Link to Comment Tyler Durden
Tyler Durden's picture


Fri, 07/31/2009 - 18:01 | Link to Comment Veteran
Veteran's picture

Thanks to Ray for keeping an open dialogue with ZH

Fri, 07/31/2009 - 18:04 | Link to Comment deadhead
deadhead's picture

Another thanks to Mr. Pellecchia for the communication with ZH.  My respect to Ray for answering TD's follow up question.

Thanks to you TD for responding to me.  Next time, you don't have to be so verbose; just keep it simple. 

Fri, 07/31/2009 - 17:25 | Link to Comment Veteran
Veteran's picture

. . .and dress like ballerinas while whipping themselves to a frenzy

Fri, 07/31/2009 - 17:26 | Link to Comment Anonymous
Fri, 07/31/2009 - 17:29 | Link to Comment Anonymous
Fri, 07/31/2009 - 17:43 | Link to Comment Arm
Arm's picture

I knew it, I knew it.  

Fri, 07/31/2009 - 17:15 | Link to Comment Warren Pollock
Warren Pollock's picture

Worked in the same firm as Bob Gasser.  

I just cannot comment.

Fri, 07/31/2009 - 17:27 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:09 | Link to Comment deadhead
deadhead's picture

warren....if you change your mind about commenting, just hop to a public library, create a gmail acct, and send a note to tips at zerohedge dot com.  best wishes to you.

Fri, 07/31/2009 - 21:43 | Link to Comment spekulatn
spekulatn's picture

Be careful out there.



"Users of Gmail, Google’s e-mail system, offer the company even more personal information. The company's computers scan all e-mail sent and received on the site, and Google uses the words contained in the e-mail messages to tailor the pop-up ads featured on the site to each individual consumer.",2933,535902,00.html

Fri, 07/31/2009 - 23:02 | Link to Comment deadhead
deadhead's picture

i think that matter has been known for quite some time. in your example, the ads are targeted to the user of the gmail account but google has no idea who the person is unless they used their actual identity during the registration.  if a person uses a public library computer, registers for a gmail account with a nom de plum (i've always wanted to use that phrase), and then sends out an email with that gmail account, nobody will know who did it (except for possibly the NSA by cross checking the time stamps on the library's video and the particular email in question).

Sun, 08/02/2009 - 22:19 | Link to Comment bbbilly1326
bbbilly1326's picture

"registers for a gmail account with a nom de plum (i've always wanted to use that phrase),"


Very sadly, you missed.  It's "nom de plume"........pen name in French.

BTW, yes, I'm always this friends love me for it.....all two of them.

Fri, 07/31/2009 - 17:22 | Link to Comment Miles Kendig
Miles Kendig's picture

It would be nice to definitively discover at long last if loyalty to the institution or the words on a DOJ agencies seal; Loyalty, Fidelity, Bravery are qualities that can be found in sufficient quantity that the DOJ.

Fri, 07/31/2009 - 17:26 | Link to Comment Anonymous
Fri, 07/31/2009 - 17:36 | Link to Comment Anonymous
Fri, 07/31/2009 - 17:45 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:04 | Link to Comment gammaman
gammaman's picture

I am going to keep on asking this question until I get an answer: when are executed cross-trade transactions (dark pools) required to report ("diseminate") executed trade into "consolidated tape" (ie, specific amount of time require by regs/rules between execution and requirement to report trade quote to public)? Can anyone provide clarity on this question?

Below is closest explanation I came across within Reg NMS rules:

SEC Regulation NMS Final Rules (523 pages)

For the reasons discussed above in section V.A.1, the Commission is retaining the current consolidation model and adopting the consolidation requirements of Rule 603(b) as proposed and reproposed. All of the SROs currently participate in Plans that provide for the dissemination of consolidated information for the NMS stocks that they trade. The Plans were adopted in order to enable the SROs to comply with Exchange Act rules regarding the reporting of trades and distribution of quotations. With respect to trades, paragraph (b) of Exchange Act Rule 11Aa3-1 (redesignated as Rule 601(a)) requires each SRO to file transaction reporting plans that specify, among other things, how its transactions are to be consolidated with the transactions of other SROs. With respect to quotations, paragraph (b)(1) of Exchange Act Rule 11Ac1-1 (redesignated as Rule 602(a)(1)) requires an SRO to establish and maintain procedures for making its best quotes available to vendors. 

To confirm by Exchange Act rule that both existing and any new SROs will be required to continue to participate in such joint-SRO plans, adopted Rule 603(b) requires SROs to act jointly pursuant to one or more NMS plans to disseminate consolidated information for NMS stocks. Such consolidated information must include an NBBO that is calculated in accordance with the definition set forth in adopted Rule 600(b)(42).* In addition, the NMS plans will be required to provide for the dissemination of all consolidated information for an individual NMS stock through a single processor. Thus, different processors would be permitted to disseminate information for different NMS stocks (e.g., SIAC for Network A stocks, and Nasdaq for Network C stocks), but all quotations and trades in a stock must disseminated through a single processor. As a result, information users, particularly retail investors, will be able to obtain data from a single source that reflects the best quotations and most recent trade price for a security, no matter where such quotations and trade are displayed in the NMS. 

*Adopted Rule 600(b)(42) of Regulation NMS defines “national best bid and national best offer.

Fri, 07/31/2009 - 18:33 | Link to Comment Anonymous
Fri, 07/31/2009 - 19:25 | Link to Comment gammaman
gammaman's picture

If "they" can get away with flash orders, why should "they" be obligated to "flash report" instantaneously to the consolidated tape? Do you really know what the latency is between an executed trade and the time you see it on your terminal? Could it be that trades are getting executed in dark pools but not immediately reported or not reported at all? Back in 2000-01 I was involved in a fidessa implementation and was surprised to learn that cross-trades at the time did not have to be reported immediately. While I find references to Regulation NMS Rule 242.600(b)(42), I can't find the rule itself, much less anything which documents the "joint-SRO plan" for  disseminating consolidated information as required by Rule 603(b). Could this be interpreted as another way for those who operate within dark pools to frontrun market (ie, execute quietly in dark pools, then diseminate transaction into consolidated tape after block trade has been completely executed)?

Fri, 07/31/2009 - 19:45 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:43 | Link to Comment peterpeter
peterpeter's picture

I believe that there is a 90 second period in which to report to the consolidated tape, per the CTA plan.  After 90 seconds, it must be reported as a late trade.

I assume that this holds for dark pools as well.

And even though I just linked this into 2 other comments in another thread, you may want to peruse this from Lime, as it touches on a few issues of reporting latency and NBBO


Fri, 07/31/2009 - 19:28 | Link to Comment gammaman
gammaman's picture

Thanks peterpeter, I'll take a look at this document and report anything else I learn. Your answer, BTW, validates my suspicions... there is a delay!

Fri, 07/31/2009 - 18:22 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:35 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:46 | Link to Comment peterpeter
peterpeter's picture

It is the folks you just listed who choose to use dark pools...

A mutual fund selling 1M shares of a thinly traded equity can place an order on a dark pool and not get nearly as damaged as if they just iceberged the order publicly.

I'd make more money if dark pools were put out of business, because there would be more chances for me to jump on poorly posted quotes, so I'm not going to shed a tear if they get shut down, but dark pools are there for the pension funds and mutual funds (and their retail investors indirectly).


Fri, 07/31/2009 - 18:53 | Link to Comment Anonymous
Fri, 07/31/2009 - 19:37 | Link to Comment Anonymous
Fri, 07/31/2009 - 20:57 | Link to Comment sellside_pov
sellside_pov's picture

Dark Pools exist because investors (mutual funds, pensions, etc...) are trying to cross larger blocks "in the dark".  IE out of sight of HFT's, market makers, arbitragers, etc...  In the so-called "lit" markets you are forced to try to slice huge orders into thousands of tiny ones in an uphill effort to hide.  Dark Pools are not the enemy.

Fri, 07/31/2009 - 23:32 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:42 | Link to Comment Anonymous
Fri, 07/31/2009 - 18:55 | Link to Comment Anonymous
Fri, 07/31/2009 - 23:27 | Link to Comment agrotera
agrotera's picture

If the mutual assured destruction defense doesn't work, they'll probably try the chewbacca defense:


Sat, 08/01/2009 - 00:21 | Link to Comment Sigma X
Sigma X's picture

a question about flash orders....what does the person initiating the order stand to gain by "flashing" the order?  Help me understand what the mechanism is for this order type.  Is it an agreement that if i place an order with you into strategy/algo x, that this can happen? or is it that i specifically intend for my order to be flashed?  I know in the past when blocks were done otc, part of your order would be revealed to located a natural counterparty.  How is this different?

Sat, 08/01/2009 - 04:17 | Link to Comment Anonymous
Sat, 08/01/2009 - 10:19 | Link to Comment Sigma X
Sigma X's picture

The market is as fragmented as its ever been with dark pools, ATS's and ECN's and the like, and that clearly doesn't help the depth of the "market" when stock trades away from the large exchanges.  But, as I said, thats always been the case to a degree.  What's new, it seems to me, is the amount of fragmentation and more importantly, using the information of a flashed or displayed order to frontrun the order.  You were always concerned about how your block was handled and who it was shown to prior to be sent to the floor or MM, but if you found out someone traded ahead of you on the information you provided, you would be looking for your pound of flesh to say the least.  I still don't understand the use of flash orders in general.  Why would i use them if i was worried about an algo sniffing the tape and frontrunning me?

Sat, 08/01/2009 - 18:04 | Link to Comment Anonymous
Mon, 08/03/2009 - 15:24 | Link to Comment Anonymous
Mon, 08/03/2009 - 15:48 | Link to Comment Anonymous
Mon, 08/03/2009 - 16:14 | Link to Comment Anonymous
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