The Proposal That Has Dark Pools Sweating; The Dark Pool Vs. HFT Scramble Is About To Enter Round Two
Dark pool operators, who have quietly been redirecting shady order flow via dark pools of "liquidity" with minimal supervision and below the radar for many years, are getting spooked by a proposed SEC rule which would have these same dark pools identifying their trades in real time, thus removing the benefits associated with what is effectively an OTC equities market (yet one to which an ever-increasing order flow, by some estimates up to 25% of all share transaction, are covertly being rerouted).
Amusingly, Goldman Sachs takes upon itself to voice what the "consensual" opinion of the buyside is, even though the firm is, at least on the surface, a sell-side organization:
"There's significant reservation from the buyside about symbol-specific
real-time reporting," said Dave Johnsen, head of equities business
development at Goldman Sachs Electronic Trading. "It's not welcome by
long-term investors." Goldman operates the Sigma X dark pool, which is
the industry's second-largest.
Are these the same investors, of which, according to Tabb, 50%+ find nothing wrong whatsoever with High Frequency Trading as well? My, my: between finding no flaws with the HFT front-running brigade (we will discuss another issue: Sub-Pennying, shortly - a totally different way you are getting scammed and didn't know it) and with the insider trading Dark Pool syndicate, the buyside community is really dying to keep getting ripped and raped by exchanges/ATS/dealers. At this rate hedge funds will need to charge 5 and 50 just to cover their transaction costs (as market neutral funds have recently come to discover).
More details on the proposal that has Goldman's Sigma X henchmen sweating and making pretty presentations for the confused SEC drones, courtesy of Traders Magazine:
The SEC in mid-November proposed several rule changes that would
affect dark pools. One proposal would require dark pool trades to be
attributed in real time to the dark pool where they occurred. All dark
pool trades already print to the consolidated tape in real time, but
they are identified simply as over-the-counter trades.
this proposal, all dark pools would have to identify their trades,
unless those trades have a market value of at least $200,000. The SEC
recommended this exception to its proposed post-trade reporting rule to
avoid hurting institutions that are working big orders.
clients have said that it could introduce potential inconvenience
without material benefit," Johnsen noted. "These investors aren't
saying, 'I'd prefer symbol-specific volume from each dark pool rather
than pool-level information."
Of course, if Johnsen had his way pool-level, and in fac any-level information would be completely curtailed. After all any information leakage from Sigma X could only potentially go to make money for such HFT platforms as... the Supplementary Liquidity Provider NYSE initiative. Which is still thoroughly monopolized by Goldman. Then again, Mr. Johnsen has nothing against monopolies either. And lo and behold: Johnsen read our minds -
In his view, certain high-frequency trading shops could benefit more
from that information than traditional buyside firms, since the former
tend to be more reliant on market data to fuel their strategies. "It
could empower that segment of the market more than longer-term
investors," Johnsen said.
Why not just trade all equities OTC with no reporting responsibilities? Morgan Stanley seems to be a fan of that idea:
Morgan Stanley also thinks real-time attribution would affect the
ability of institutions to trade quietly in dark pools. "Real-time
attribution to a dark pool would impact volume in dark pools," said
Andrew Silverman, global co-head of electronic trading at the
broker-dealer. "Long-onlies would be less likely to put orders into
dark pools," because of information leakage concerns. Morgan Stanley
operates two dark pools.
Cause the last thing anyone would want is for long-onlies to trade on the same venue as everyone else, and be subject to the same limitations. Ah, but then how would Goldman and MS earn their "premium" fees. Yet wasn't Sergey Aleynikov a part of the Goldman algo brigade? Surely he would disagree with Goldman's Johnsen... if he didn't have a gag order of course.
Which brings up an interesting point: all the HFTs out there claim they have the most legit, innocent and altruistic intentions when they let lose a bunch of predatory algos to rip, steal and frontrun the crap out of the "long-onlies." Yet the dark pool guys are saying they need to exist because of the dangers of high frequency trading... So who is lying? The simplest resolution to it all is, once again, to do away with the adverse selection characteristics of HFT (and HFT in total if need be), and to move all dark pool operations to open exchanges, so that the market will no longer be multi-tiered to the point where one's head spins in trying to make sense of just how many different ways one is being robbed.
That way those so highly valued "long-onlies" won't suffer, poor things.
Some more on this, from Kevin Cronin, head of equity trading at Invesco:
"Real-time information about where dark pool prints take
place would harm institutions. Identifying the source of dark pool
prints will benefit high-frequency traders. That
absolutely is not good from an institutional perspective," he said."
But wait, wait, wait: didn't Invesco presumably among most others, claim that HFT is benign and in fact good for the future of humanity? It appears not:
"As more blocks are traded in algorithms, there is the potential for
more information leakage with real-time, venue-specific reporting of
smaller trades. People can see the small trades and try to
figure out whether there's an aggressive buyer or seller in a
Hm... Something definitely is fishy here. We would suggest that Senator Kaufman have a nice little prisoners' dilemma experiment: in one room stick Dave Johnsen of Goldman, and in other have Jim Simons (quick, 20 more day and he retires). Then do a good cop/bad cop routine until one rats out the other. Then ban both.
Of course, in a market so terminally broken as our currently is, getting rid of dark pools or HFT exclusively, will do nothing but make the adversary stronger. Which is why we sure hope that the SEC's regulatory overhaul of market structure is proceeding well (and hopefully not 10 years behind plan already), because at the end of the day nothing short of a revolutionary change in the way any given block of shares is traded (and front run by Mr. Johnsen's very own colleagues over at the NYSE' SLP division), will get the retail investor, pardon, speculator, back in this corrupt and manipulated market.