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Moody's Chimes In On The Consequences Of The Flash Trading Ban
In their weekly commentary piece, among many other things, Moody's discussed the downstream impacts of the ban of Flash, IOIs and other existing practices. They provide a different perspective in terms of a pros/cons analysis of the upcoming changes to both brokers-dealers and exchanges. Nothing earth shattering, but useful information to keep a sense of perspective in light of upcoming market structure developments, and who stands to lose the most.
More relevant to us seems the question of whether a ban on “flash” orders would be a precursor of more changes in the market structure. The modern U.S. cash equities market is a highly complex network of electronic trading platforms with a myriad of order types, order flow aggregation mechanisms, and pricing schemes. As a whole, the market is also very liquid and extremely competitive. The pricing pressure exerted on exchanges by brokers and traders trying to keep their execution costs down is intense.
A major component of the market’s competitiveness stems from the fact that over 30% of total U.S. cash equities trading takes place away from exchanges, and about 50% away from NASDAQ OMX and NYSE Euronext – the two major exchanges. Much of this order flow is either “internalized” by major brokers or is directed to “dark pools,” which are a type of ATS. As with “flash” orders, the traders and platforms executing trades via these means benefit from the price discovery that occurs on “bright” venues (e.g., exchanges), which post visible firm quotes to the NBBO. But none of these trading venues contribute to price discovery.
Furthermore, there are other reasonably common market practices, such as the so-called indication-of-interest (IOI) orders, which are used to link dozens of dark pools among themselves and with other venues, that function in ways that are similar (though, not identical) to “flash” orders and could therefore be subjected to similar criticisms. [TD: this statement agrees with the thoughts presented yesterday by Credit Suisse, and represented earlier by Zero Hedge]
Were market practices such as internalization and “dark pools” also to be prohibited or made significantly less attractive – perhaps, on the grounds similar to those that may apply to “flash” orders – this could change the industry’s competitive landscape in a major way. It would shift an important degree of pricing power to exchanges and away from brokers and traders. All other things being equal, this would generally be positive for the credit profiles of exchanges and could be negative for institutional brokers.
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Moody's ... Correct me if I'm wrong, but aren't those are the guys that rated subprime-mortgage-backed securities as AAA securities, allowing the mortgage crisis to escalate into a full-blown banking crisis which nearly destroyed our entire economy?
Hell Ya! These guys are badass! These guys are so badass, I know, they are on the verge of downgrading that AAA US credit rating! These guys don' t give a shit!...Moody's...Hell Ya!
they are on the verge of downgrading that AAA US credit rating
HA! They won't downgrade the credit rating until the U.S. actually defaults.
Thanx to TD now small retail day traders denied the chance to piggyback the big guys into prospeity(lol)
stock market blogalways another fool and now the fools are those investing in the stock market for companies that have very little earnings and poor prospects.my newest bookmarked finance site ..http://www..
hat tip: finance news & finance opinions
Why the fuck are institutional brokers allowed to trade at all for their own accounts (and frontrun their clients) is beyond me
I never understood why a stock that is moving in a slow linear bid/offer range, suddenly collapses 10-30 c or more for no obvious reason. But always thought it would be nice to take advantge of and ride the few pennies up. And thanx to zh I understood the reason,but also lost the chance to take advantage of it(never did even dare to do it anyway)lol
"All other things being equal, this would generally be positive for the credit profiles of exchanges and could be negative for institutional brokers." So.
Compartmentalization is for secrecy and nothing else.
The only market in the world where buyers chase sellers,and not the other way around. The only market that I know of that goes by 200 sma,8 ema, 50 sma and so on. And what does it sell?a piece of paper. And the poor car salesman get all the bad reputation. With engine and metal and all,he is the one who chases buyers.....................
In my mind and maybe I'm a fool. All shares through one keyhole and one keyhole only. Only then is there true price discovery. All of it!
You aren't a fool. You're just wrong. What most people don't understand is that dark pools, ioi's, flash orders, etc... give large traders a means to hide their orders from prop trading hedge funds. The more information people are forced to expose, all that information is rapidly aggregated and used against them. What's good for the public, retail trader is amazing for HFT's, prop traders, etc...
I'm not worried about the retail trader. If a large block must be dumped, then they should have to go to market to dump them. Oh shit, a price spike. Allow a market to function as a market.
Push / Pull. If a hedge fund can't dump them economically, then they are phucked. They should not have bought them.
Then who are you worried about? Who do you think the winners and losers would be if say, dark pools were banned?
The market would be amongst the truly predictive ones. Why buy oil if the market is going electric. It seems to me the market would function as a true market. Someone will be left with the bag. The transaction speed and compartmentalization is about capital investment gaining an advantage - nothing else. Large sums of money going towards nothing substantial. That's not a market.
Didn't get an answer to my question. Transaction speed is the result of people slicing their orders very thin to expose as little information as possible. Compartmentalization is people trying to avoid the public markets altogether, again to avoid exposing themselves. Who do you think they are trying to avoid?
Slicing orders assumes a buyer and lots of them. To prevent exposing and an iceberg as it were. Compartmentalization creates a market on the side. They are not trying to avoid, they are avoiding the market. If the buyer and seller were forced to gather in one place and expose their position to the rest of the market. The market price would react. The result of dark pools is to transfer large blocks quietly without ever exposing position or supply/demand to the broad market. This is not a market. Your question - the market as a whole. Nothing but side deals paid handsomely.
Every time the rules change, certain players benefit, and others are disadvantaged. The market as a whole might benefit. But it's worth considering who WITHIN the market wins and loses. It seems like you are avoiding considering who the beneficiaries of dark pools are. Note I'm not trying to pick on you specifically. I'm refering to the more general problem here. There are lots of people with opinions on the market structure, but few seem to have thought deeply about the actual mechanics of the trading process.
Side note. Dark pools don't allow anyone to avoid exposing supply and demand, as all of their volumes are publicly reported just like trading on the major exchanges. The difference is that you can put a large open order into a dark pool and no one will know about it unless you get filled.
"The difference is that you can put a large open order into a dark pool and no one will know about it unless you get filled." by a large order. i.e. outside of the market or inside another market. You choose.
And when Paulson dumps his BAC and COF noone will know. Works for him!
They will know because the volumes are reported just like any exchange. Seems like no one understands that. It's basic.
And secondly most investors trying to trade large blocks would rather find one or a few other large traders to take the other side rather than risk getting chopped to bits by order anticipators (HFT's) in the public market.
Two words.
PRICE. DISCOVERY.
bingo. this is the key - if dark pools were banned, it would help the HFT guys most of all. that's why i don't understand why TD is on a rampage against dark pools...
Neither do I (understand it).
The angst against all of HFT, Flash and Dark Pools seems like a mis-guided backlash against things that have poorly chosen names, or are just mis-understood.
While I am supportive of all 3 of the above, I can understand someone talking their book and liking Flash but not Dark Pools (some HF funds for instance), or Dark Pools but not Flash (mututal funds).
The only people who seem to dislike both Flash and Dark Pools seem to either have a philisophical bend that all trading should be done in the open on a single exchange (no internalization, no dark pools, no non-displayed orders, and probably no ADRs if they gave it thought...) - or else they are simply against things because they think Goldman Sachs makes money utilizing them, which is pathetic.
At least you can cleanse yourself with toilet paper. US dollars... not so much.
We just good articles; my newest bookmarked finance site ..http://www..
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Heh, I have a nice quote from W.D. Gann for ya...
"STOCKS NOT MANIPULATED: Before the Stock Exchange started regulating brokers and the control of markets, there was manipulation and pools often were organized that could advance low priced stocks that had very little merit to extreme high levels."
Phil Roth also commonly speaks of dark pool trading being more common just like back in the 30's.
"just like back in the 30's". Exactly, reminiscent of the bucket shops of lore. How's it any different?
It's not. We had funds of funds as we do now creating a massive Ponzi scheme. The list is so long I'm not even going to start. As I have said before, history loves to repeat itself.
Cookie Lady needs to get on tv and reassure me everythings ok now.
the sub prime market scum traders have just gone to another market and suckered more mug punters like they did before
always another fool and now the fools are those investing in the stock market for companies that have very little earnings and poor prospects.
Go from one bubble to another, the economy is behaving like one huge casino but this time the government are the ones in huge debt baling out the punters and giving them more money to bet! Talk about giving an alcoholic more alcohol so he can sober up, this is ridiculous
Roll up, roll up, get your snake oil here
Watch the markets in far east tonight and see if they are fooled by this market move today
I credit them with a lot more sense in Japan because they have been there done that and they had a lot of savings going into their problem
If their market goes down then they know the fake emperor of the US has no clothes and will get his nuts frozen till they shatter
Do institutional brokers still exist? They get FREE MONEY for getting in between institional orders and the market. Keeping the market fragmented only helps the FUCKS that get that order flow.
If you really believe that, then you have no idea how institutional trading works. Most big institutions have plenty of options for accessing the markets. They could become broker/dealers and access directly, however they usually choose not to because the regulatory requirements would cause them to tip their hands to other participants.
Institutional brokers provide anonymous access to markets, as well as facilitating execution. Whether its through a cash desk executing large blocks, dma, or by providing execution algorithms. Go back to yahoo finance and your half-baked understanding of how markets work.
Dark Pools are unnecessary because some ECNs support hidden orders and iceberg orders. Large funds can hide their intentions by using these order types on ECNs. The ones who really benefit from Dark Pools are the firms that run them. Dark Pools further fragment the market, which is counterproductive to the funds trying to work large orders.
Not sure I see the difference between an "iceberg order" (read: order the public cannot see) and an order in a dark pool. I think one just sounds more scary than the other.
Giving all the power to the exchanges is a problem as well. Having one gate keeper instead of many can be very problematic.
However, ruining transparency can be an issue as well, of course.
I think in the end is that we need to eliminate large companies. Once you get to a certain size, you need to break up.
This would keep individual players from manipulating the markets and it would ensure that we don't end up with 'too big to fail' type situations or financial oligarchies.
We also need to make sure that groups of investors don't end up as implicit organisations that are 'too big to fail' (eg, everyone makes the same 1 way trade).
Once we do that, then it's all about survival of the fittest. No more government bailouts.