dark pools

"Has the era of the dark pool come to an end?" Thus begins the Traders Magazine cover article "End of the Line? SEC Targets Dark Pools and Off-Board Trading", which deconstructs all the incipient issues, criticisms and concerns facing the utterly discredited Mary Schapiro who is hell bent on getting at least one thing right during her career at the SEC, before she is brushed off as even less effective than her arguably much worse predecessor Chris Cox.

Now that Flash trading is practically a thing of the past, everyone's attention is shifting to dark pools. And if the just released letter by the World Federation of Exchanges is any indication, dark pools' days could be comparably numbered.

"The environment of exchange trading has been altered, and in sorne ways has been adversely affected by many of the changes that have occurred in the world's financial system in recent years. Therefore, the continued proper functioning of regulated exchange markets should not be taken for granted." - World Federation of Exchanges Letter to G-20

Per a letter disclosed in the WSJ earlier, it appears the torch that Chuck Schumer picked up for a regulatory response on Flash orders is now being carried up by Senator Ted Kaufman over a much broader set of market issues: in fact Kaufman seeks a neutral review of virtually every aspect of modern equity capital markets.

I heard an incredible thing yesterday. Apparently, mutual funds are being stolen from by algorithmic traders.

Late in the day "The Narrator," one of our dedicated public relations gurus, spoke for almost an hour with a reporter who called in to talk about high frequency trading, dark pools and topics of similar ilk. I talked with The Narrator for a couple of hours after the encounter. I paraphrase: What, the reporter asked, do we make of the argument that "predatory algos" (a brand of algorithmic trading) cost large mutual funds billions a year by sniffing out "iceberging" (the practice of breaking up of large orders into smaller blocks to avoid swinging the price significantly in response to a large block of demand or supply)? What did we make of the TABB Group's estimate that $20+ billion in profits stem from certain algorithmic trading strategies. Are algorithms evil?

In a word: no.

Read on for some major exciting changes to market structure.

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.

Thought provoking

No direct correlation between the two, but a couple of good videos to start off your morning: Denninger on Kudlow - ever wondered what a bear in a Pamplona stampede looks like, here is your chance - this proves again why the Brady Bunch talking head box format is the most useless medium to convey any sort of informative message (but works miracles for those Mercedes commercial CPMs). And also a much more informative piece on Dark Pools.

Zero Hedge has been the subject of much (welcome) ridicule both retail and institutional, for continuing the barrage of Indication Of Interest screens (also: IOIA tag) and information for the benefit of our readers, which I have been showing consistently over the past month, ever since I had a feeling there is something peculiar in the advertised trade flow pipes.

The same "liquidity providers" that have been discussed previously in Zero Hedge, are also in dark pools to make sure trading costs are shifted from observable to less observable or not directly observable. Observable trading costs are the difference from VWAP, open price or arrival price + commission and spread costs. Less observable are bid/ask drift before a dark pool print.