Why An End To Dark Pools Would Be A Clear Nightmare For The Fed

Tyler Durden's picture

Be careful what you wish for. As the Fed imbibes a sense of confidence in its ability to manage any bumps in the road on its perpetual bubble-blowing mission through the use of macro-prudential policies (big words that truly mean nothing) as stock valuations surge and the repo market is experiencing severe problems; it can always point to VIX as an indicator that all is well in the world and no real risk exists. The problem is - the world is beginning to wake up to the 'odd' micro-structure of the US equity markets and how 'dark pools' are beginning to dominate trading volume. As Barclays faces major legal problems over its alleged dark pool lies, lies, and more lies, the Fed must be growing concerned... as the following chart shows JPMorgan indicates there is evidence of an inverse relationship between equity volatility and the share of off-exchange trading.

Off-Exchange trading has soared since the financial crisis...

Off exchange trading rose sharply in 2009 with volumes almost doubling vs. 2008. But off-exchange volumes declined since then for three consecutive years i.e. during 2010, 2011 and 2012. The average daily volume of off-exchange share transactions rose in both 2013 (+6.4%) and in 2014 (+6.1%). This compares to -8.9% YoY change in exchange trading volumes in 2013 and +3.3% in 2014 YTD. That is off-exchange trading has grown much faster than exchange trading over the past two years. As a result the share of off-exchange volumes as percentage of total equity trading volumes jumped in 2014 to 37%, the highest ever (Figure 2).



YTD 2.4bn shares per day were traded off-exchange vs. 4.1bn shares per day in traditional exchanges. For comparison, in 2008 2.1bn shares per day were traded off exchange vs. 7.7bn on exchanges. But, we note that the improvement in off exchange volumes over the past two years does little to alter a picture of still subdued overall equity trading volumes.

With dark pools dominating...

As mentioned above dark pools or ATS represent only a part of off-exchange trading and reporting has started only recently in May 2014. For the two weeks commencing May 19th and May26th FINRA reported an ATS trading volume of 0.78bn shares per day which accounted for 39% of off-exchange (TRF) volumes for these two weeks and 15% of all trading volumes (on and off exchange) for that week also. That is, dark pools or ATS account for around 39% of off-exchange trading activity and 15% of all equity trading volumes.

But there is a relationship between stock volatility and off-exchange trading...

We find evidence of an inverse relationship between equity volatility and the share of off-exchange trading.



This is shown in Figure 3 which suggests that big drops in equity volatility in the past were associated with shifts towards off exchange trading. One potential explanation is that price competition intensifies when volatility goes down, as overall volumes also decline, causing a shift in equity trading towards lower cost off-exchange venues.

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Simply put - the end of dark pools would be the end of the complacent benign risk markets that the Fed enjoys control over...

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order66's picture

Now imagine this scenario along with raising rates. Double whammy for the Fed since they will also have to deal with big payments on all that debt they bought. Epic disaster seems inevitable now.

AdvancingTime's picture

I agreed ugliness lies ahead and we should not give the clowns in Washington to much credit for having complete control. The end game is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.

For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.


Manthong's picture

It all makes so much sense now.

The NYSE, S&P and Comex is like the pawn store front for the crime ring.

Everything looks quiet (VIX) in the storefront as the crooks pawn off their loot but the set-up all happens through the back door and in the back room.

Eventually though, they will trip themselves up.

Hmm.. that brings to mind Maynard and Zed and a happy ending.

AdvancingTime's picture

At some point the ability to manipulate markets higher will end and we will be forced to face our economic Armageddon. The forces that have driven stock markets ever-higher and upward may be beginning to wane. Many markets became distorted years ago when QE and super low interest rates hit the economy in an effort to lessen many of the missteps of recent years.

This has been more helpful in holding up the underlying value of assets and derivatives it now appears than helping to repair a wounded economy. QE has up to now stopped an implosion of derivatives including the resulting contagion and shock that would have spread throughout the financial system. Unfortunately the economy has not fared as well as these asset prices and in many ways these policies have harmed Main Street. More on this subject in the article below.


Silky Johnson's picture

The shit is called a dark pool, the nefarious mortherfuckers operate in shit called DARK POOLS. You think anything good can come of that?

overmedicatedundersexed's picture

The TBTF, are creatures of debt, in 2008 if normal BK law was allowed and more large banks and wall street firms went under, it would have forced focus on all debt both national and corp and private- the FED and CB across the world would then be at great risk of the magic fiat debt machine would likely have been exposed..ergo ridiculous finance of today, it seems like nonsense at a high level , with outright lies (BLS in USA), explosion of stock markets and bonds at multiyear lows (opposite of what risk premium used to mean).

they opted for this chaos called finance markets, as the alternative would risk the great game of money from nothing, and only the 0.1% have power over it and benefit from it.

they will happily  kill us all before they will loose wealth and power. Only we the people of all countries can take them on, if only the true message of ZH could reach them..the TBTF are criminals and all who have bent and broken our laws from IMF BIS to SEC and DOJ and congress are guilty. J' Accuse.

orangegeek's picture

This is going to be Barry's undoing. (this fkd up market isn't front page yet, but it will be soon)


It has been written many times that Barry and his band  of communists want to collapse the US system/global system.


Alone, Barry can't do it, but Europe, Japan and China are following along nicely.


These people are smart - no question - so by collapsing a global system, what do they accomplish??


BTW, collapses bring about massive wealth transfers even amongst the so-called 1%.

bbq on whitehouse lawn's picture

Accomplish? Control. It is never about money to those born into it. Its always about controling you, like pets using tricks and treats.

Eyeroller's picture

So just HOW are dark pools supposed to be eliminated?

Fed will only get worried if they are gone.

Fuh Querada's picture

The pathetic imbecility of the dolt Yellin' lends credence to Jim Willie's hypothesis that the Chinese have already purchased the Federal Reserve.

Bryan's picture

haha... Fed imbibes a sense of confidence?  Good one.  Yes, they are sucking confidence out of the people.  :-)

Maybe the dark pools are just dark urine that they're imbibing?  lol

NoDebt's picture

Causality?  I could argue it the other way around.  When volatility on the major exchanges drops, they turn to dark pools where they can CREATE THEIR OWN VOLATILITY.

No idea if that's what's happening, but it bears noting that there's more than one way to interpret this data.

CerpherJoe's picture

Nice observation. HFT likes volatility.

viator's picture

There is a black swan out there somewhere. My bet, Kuwait falls to ISIS.

bbq on whitehouse lawn's picture

I could be that the dark pools are draining into the retail markets. For what end?
All the signals this year point to massive if not hyper-inflation.
Inflation is political so the decision has been made.
The question of what was it going to be, Japan deflation or Germanys hyper-inflation seems to be coming to a head.
If the powers choose hype-inflation maybe they believe they can control it.

If so, thats hubris. Dangerous hubris.

tnfcfa's picture

There is also a correlation between avg points in NFL games and % off exchange volume.

yogibear's picture

If the powers choose hype-inflation maybe they believe they can control it.

The Fed believes they can continue to control it. Once dollar dumping comes about these fiaters will panic as they lose control. Just like subprime is contained. How did that work out? This will be far worse.

Bemused Observer's picture

I'm always amused by folks who speak as if the Fed knows what they are doing, as if they have a plan.

I don't think they do. I think they are just trying to tread water, in the hopes that SOMETHING will come along and save them. Maybe that old business cycle will return, maybe there will be a distracting war, maybe some wonderful new invention will turn everyone's attention away from the economy. They just have to keep the head above water a little bit longer...

I also think they are aware that this might not end well, and that they have no plans for that either. Yeah sure, DHS bought a lot of ammo, but that smells more like fear than planning to me.

I also think there is a part of us that WANTS to believe there is a plan, even an evil one. The idea that these people we have put in power might NOT have one is too scary for many of us. That they are just throwing everything at the wall to see what sticks is inconceivable...that's what WE are supposed to do! THEY are supposed to know what they're doing, and if they don't, then we're just sitting around while some incompetents fuck everything up. So we have to pretend they ARE competent to spare us the shame of allowing them to be in charge in the first place.

Quinvarius's picture

I agree.  The same goes for our foreign policy.  There are all kinds of conspiracy theories about what is going on as if there is some evil masterplan.  But there isn't.  These people are fucking morons.  Nothing they do makes sense unless you consider the possibility they are doing it for their own personal momentary gain at the expense of everyone else.  

And then there is the Pope who just announced it is okay to be a sodomite and you can't have a dangerous personal relationship with Christ.  WTF is going on in the world?  


Clearly, the Fed is stalling for time as you state and they have had no idea whatsoever since Geithner patched up Lehman, Bear Stearns, AIG, Fannie, Freddie, and all the rest in 2008. Geithner gave the fix to Bernanke and Bernanke passed the petro-buck on to Yellen. Clearly,

Bernie Madoff must be shaking his head right now, and wondering when he will see his old colleagues taking up residence in the next jail cell?

Is there a difference between Yellen's skullduggery and Geithner's?

Did Paulson and Geithner actually fix the financial system back in 2008 or did they simply forestall what is strating to appear now? I suspect that Paulson and Geithner are looking for a way to escape the USA before they are indicted and jailed. Their passports have been taken from them and they cannot leave the country until they get them back.

Please do not issue these individuals passports anytime soon.

Bemused Observer's picture

Those financial guys knew they and their friends were going to lose big-time, and they wanted to prevent that. But that shirt-losing is a necessary part of these types of financial events, and by interfering they have only ensured a bigger collapse down the line.
But they really had the arrogance to think they COULD avoid paying the piper. All this bullshit now is just to prevent the asset-rich from losing their great wealth.
This thing goes nowhere until they let Nature take its course. If they won't let go of their extra, the market/economy will just slow-bleed it from them over time. Look at corporations buying back their own stock just to keep the price supported...how long does THAT go on without real profits coming in?
Governments will be bled by the reductions in tax receipts due to folks not earning enough to tax, and the increase in people needing assistance.
Creditors will be bled by the waves of defaults.
The banks will be bled by the drying-up of business and credit markets, and the slow withdrawal of retail customers.
All these things will continue until either TPTB throw their hands up and take their medicine, or the economy collapses under its own weight.

Vin's picture

I respectfully disagree.  The plan has been in place for 100 years now and the great finale is to loot the Treasury, take every last ounce of gold available, and then collapse everything.  Then America will be begging for the one-world-govt crowd to save us.

Bemused Observer's picture

But that would take a level of planning across several generations that I just don't see possible. These folks can't get it right in their own lifetimes, the idea that they can implement plans from before they were born to coordinate with folks born after they are is simply not believable.

SAT 800's picture

There is an inverse relationship between off-market trading and volatility; I'll bet there is. That's where the "volatility managing" goes on. Just anothing way, another mechanism, by which this "great rally" can come un-glued.

SillyWabbits's picture

Keeping international reserves in “dollars” means that when US financial speculation and deficits payment pumps “paper” into foreign economies, forcing foreign central banks to bear the costs of America’s expanding military empire with little option but to recycle it into US Treasury bills and bonds—which the Treasury then spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers: China, Japan and Arab OPEC oil producers.

These governments are forced to recycle dollar inflows in a way that funds US military policies in which they have no say in formulating, and which threaten them more and more belligerently.

The MSM, promote the assumption that recycling the dollar to finance US military spending is the international community’s way of “showing faith in US economic strength” by sending “their” dollars here to “invest.” The implication is that a choice is involved.

 However, the foreigners in question are not consumers buying US exports, nor private-sector “investors” buying US stocks and bonds. The largest, most important foreign entities putting “their money” here are central banks, and it is not their money at all.

 They are sending back the dollars that foreign exporters and other recipients turn over to their central banks for domestic currency.

The US economy can create dollars freely, now that they no longer are convertible into gold, or even into purchases of US companies. Consequently, the US remains the world’s most protected economy. It alone is permitted to protect its agriculture by import quotas, having grandfathered these into world trade rules half a century ago. Congress refuses to let “sovereign wealth” funds invest in important US sectors.

US Treasury prefers foreign central banks to keep on funding its domestic budget deficit, which means financing the cost of America’s wars and encirclement of foreign countries with rings of military bases. The more capital outflows US investors spend to buy up foreign economies—¬the most profitable sectors, where the new US owners can extract the highest monopoly rents—the more funds end up in foreign central banks to support America’s global military build-up.

The ultimate question is what countries can do to counter this financial attack. How can nations act as real nations, in their own interest, rather than in America’s interest? Any country trying to do what the United States has done for the past 150 years is accused of being socialist or protectionist—this from the most anti-socialist economy in the world.

The problem of speculative capital movements goes beyond drawing up a set of specific regulations. It concerns the scope of national government power.

The International Monetary Fund’s Articles of Agreement prevent countries from restoring the “dual exchange rate” systems that many retained down through the 1950s and even into the 60s. It was widespread practice for countries to have one exchange rate for goods and services (sometimes various exchange rates for different import and export categories) and another for capital movements. Under US pressure, the IMF enforced the pretense that there is an “equilibrium” rate that just happens to be the same for goods and services as it is for capital movements. Governments that did not buy into this ideology were excluded from membership in the IMF and World Bank,¬ or were overthrown.

The implication today is that the only way a nation can block capital movements is to withdraw from the IMF, the World Bank and the World Trade Organization (WTO).

For the first time since the 1950s this looks like a real possibility, thanks to worldwide awareness of how the US economy is glutting the global economy with surplus “paper,” and US resistance to stopping its free ride. From the US perspective, this is nothing less than an attempt to curtail its international military program of global domination.

It is impossible to look at any one venue of exchange and compute an accurate outcome.  The levers of power are many.  With the Central Banks, it is analogous to an organ keyboard, which can play many tunes to entertain whatever audience is in attendance.  The important thing is harmony! 

Vin's picture

Honest question:  From where do we get data on off-exchange trading volumes?