How "Sub-Pennying" In Dark Pools Ignores SEC Rule 612, Makes A Mockery Of The NBBO, And Is Another Illicit Source Of Billions For Wall Street

Tyler Durden's picture

One of the key "market integrity" (actually, much more appropriately said, lack thereof) topics that has not been touched at all by the Mainstream Media is the issue of Sub-Pennying, or the process of stepping in in front of displayed orders in blatant violation of NBBO rules as determined by Rule 612, in which broker-dealers profit to the tune of billions of dollars from "playing inside the spread" and in the process compromising the NBBO, having stocks being propped up by passive limit orders, pushing legitimate liquidity providers out of the market (after all,who wants to be constantly front run by block sniffing algos) and in general hurts the price discovery process. With regular exchanges predominantly used by schmucks and market small-timers, who trade in small volumes as the bulk of block order traffic has moved to various ATS and dark pools (primarily that of Goldman Sachs' Sigma X) leave it to the pros to find a way to make a mockery out of the market. Of course, as long as everyone is buying (with the taxpayer selling involuntarily) nobody has much reason to complain. However, when the ponzi ends and the rush to offload hits a fever pitch, the spirit of friendly thievery may turn sour very, very fast. Also, anyone who has any illusions they can trade fairly in dark pools (or the broader market), you have our condolences. We present a great guide on the dangers to market integrity from Sub-Pennying as presented by Dennis Dick of Bright Trading.


Recently, Dennis met with the SEC and presented the following list of publicly filed concerns with equity market structure, which we are confident Mary Schapiro will skim through, promptly forget, then revert to encouraging her employees never do any work and scour for pornography all day long. Hey Mary, what happened to Flash trading? Don't worry - we are launching a weekly reminder campaign which with the benefit of 8 million monthly page views will make sure you don't forget about it this time.



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GoldmanSux's picture

In the past 3 years, exactly nothing has been done by anyone. No Freddie/Fannie reform, no OTC derivative reform, no AIG resolution, no leverage reform, no FDIC reform, no HFT, no Flash. Oh yeah, mark to market was reformed.

Missing_Link's picture


The lack of movement on all fronts is mind-boggling.  Where's the "change"?

John McCloy's picture

  Yup and that is what frightens me that with so many compelling arguments are blatant proof of insider trading, political job capturing by Wall Street funds, the increasing damage of fighting busted bubbles with bubbles, destruction of 10 years of market gains and the impunity with which Wall Street continues to operate without fear of prosecution they still decided to direct the mortals to the roller coaster for one last ride for surely things will be different this time around. 

Someone said it here best, "As long as their is a beer in the fridge and a Twinkie on top of it the zombies do not care". If they were as concerned about their economic liberty as they are American Idol Wall Street could not get away with this daily pimp slapping.

Missing_Link's picture

Yes, and when a few brave souls take to the streets to try to actually do something about our fiscal insanity before it's too late, they are immediately lambasted by the media as "racists," "hatemongers," "ignorant xenophobes," "right-wing gun nuts," etc., etc., etc.

if's picture

And shorting was made more complicated.  Can't have the markets going down.  Unfortunately, regulators are very good at devising rules which favor the status quo without consideration for the long term consequences of biased markets.

Hugh Janus's picture

and blatant rampant fraud everywhere and no one charged with a single crime, they actually got paid bonuses!  can someone explain to me why martha stewart went to jail?  anyone know what tanning bed leo mozilo is hiding out in these days?

cindycheng's picture

I will get to know more new information. Even the website layouts and the designs impress me a lot.
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Cookie's picture

But Mary shags Ben, Timmy, Larry and Paul when he can get it up, so no worries!

InsanePonziClown's picture

excellent artilce, just showing it's not the rule, it's the loophole where money is made

Missing_Link's picture

This is earth-shattering stuff.  I hope the SEC gets its act together and implements all of the recommendations on page 29.

jmc8888's picture

Reminds me a bit of the scam they ran in 'Office Space'. 

if's picture

Great article, very concise.  In the early days of electronic trading significant price improvement was common.  Nowadays it usually consists of a suspicious sub penny improvement designed to jump in front of real liquidity providers.

Please keep us updated on this. 

1fortheroad's picture

Thanks, answers allot of my questions. I see the sup-pennying all day long.

I hope their ill gotten gains rip their bellys wide open. 

barthezz's picture

the lesson of all of this.. instead of finding mispricing and providing liquidity, find mispricing and remove liquidity.

omi's picture

How is it any different than if I step in bid and ask in a stock that normally trades 3-5 cent bid/ask spread and provide 1-2 cent spread?


It's the same decimilzation concept taken further. But of course, people in USA can't divide by 10 without a calculator.

If you ask me, I think all stocks should be trading at 6 decimal points. This will allow to execute large trades on exchange at prices that the buyer/seller of the large trade is willing to pay with the inaccuracy from large number of shares multiplied by the spread (not bid ask, but between going sub-penny and penny only)

jortex's picture

The difference is you are allowed to do that. You are not allowed to trade sub-penny only "they" can, thus giving "them" another unfair advantage.

Pure Evil's picture

Man, you must have a real hard on for that magnificent slut, Mary Shapiro.

What makes you think she will skim through it? I sincerely doubt that she even made it past the cover. Too busy gazing at porn while getting busy with her A/C outlet operated dildo to bother perusing the webpages of Zero Hedge, I have no doubt.

And, all your weekly reminders will just bounce off her thick numbskull. Exactly what is the density of lead.

I wish you well on your new adventure Don Quixote. Have fun tilting at windmills.

Is anybody gonna read this damn comment or am I barking up the wrong tree.

overbet's picture

You all should make your voices heard. Now is the time when they are open for comments. Let them know how you feel. Here is the link it takes 5 minutes and may amke a difference.

hooligan2009's picture

i posted my comment on the wrong page..was that an off market trade in a dark pool? I think this epitomises the heart and soul of the fair and common person and compares it beautifully with the machine. Why can't this trader know who is in the bid, pick up the phone and cross at mid? This is ground zero, the place before the big bang...characterise it across 100,000 trader not even noticing screen trading is this blatant a fallacy. Don't take prices, dont allow an exchange or any other liquidity pool force you to take prices. Pick up the phone and deal sharper for less. Screw the exchanges..they are part of the borg and fail in their mission.

Bertie Wooster's picture

A somewhat decent outline of the problem, but it misses completely how sub-pennying allows a risk-free trade to broker-dealers, one tenth of a penny risk because you can always sell to the REAL liquidity provider--the retail limit order, and full spread as profit if the trade goes in favor of the liquidity provider.  the liquidity provider who has the insight doesn't get filled, but the broker dealer does, and reaps the profit.

The solution provided is terrible.  The solution is simple:

By the nature of the way markets work, you cannot eliminate "trading ahead" which is what sub-penny trades and order-flashing are meant to do.  The only way to eliminate it, is to allow the government to own the exchanges, and you know how governments destroy things, so that's not an option (see airports, taxation, post office, and the housing market for details on why gov't shouldn't run anything, or regulate anything)

Eliminate the SEC and all it's regulations.  When banks steal from customers, the customers can stop trading and exit the market, leaving no real liquidity.


Lastly, nothing will prevent flash crashes, trying to eliminate them is impossible.  Flash crashes have nothing to do with sub-penny and flash-orders, they have to do with fear, and fear cannot be regulated anymore than screaming can be outlawed when someone is surprised.  So the best you can do is let the market work out who's cheating too much.  If the perception is that the Nasdaq (insert market here) is rigged, then people will move to another exchange when possible, or will stop participating in the stock market period.  It works anyway, because only those who make money long term, stay in the stock market.

We can also extend this SEC abolishment to accounting too.  If a company like Fiske's railroad is rigged, investors become wary and stay away, the insider-jobbers get a bad reputation.  Good companies who really need access to capital markets then emerge, with solid self-policing accounting practises.  


The market works folks, just stop regulating it.  What needs to be regulated is the governement's ass-fucking of the money-supply after leaving the gold standards in 1932 and 1971.  If the gov't wants money to supply a stupid war (Vietnam) or a stupid social program (Great Society or New Deal), politicians should be forced to ask citizens for payment in non-leveraged gold (therefore sweat).  This would avoid bad wars and bad policy.  and wouldn't that be nice.  


SOLUTION TO EVERYTHING:  outlaw government monopoly on money and credit, allow private ownership of money supply.  Will that lead to some bankruptcies and bad practise? Sure it will.  But only those that like risk get hurt, the vigilant and safe are protected.  









cindycheng's picture

Interesting to read all the new responses, thanks for all the current news and updates. Hope to read more very soon.
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