Dark Pool Flush: Game Over Pipeline; Next Up Goldman's Sigma X?

For years Zero Hedge has been exposing the persistent fraud that goes on behind the trading scenes, not only in High Frequency Trading, but also in various dark trading venues, known better as dark pools where exchanges, typically the banks themselves get to match buyers and sellers without any indication of a trade having occurred, until much later if at all. Recently, and very much as we expected, trading firm Pipeline was smacked down by the SEC for gross violation of customer orders, an offense which can be summed up simply as: frontrunning. We now learn that, as the Wall Street Journal reports, Pipeline is pretty much finished after the Chairman and CEO have both quietly left the sinking ship. The WSJ adds: "The case was the SEC's first enforcement action involving dark pools, and it shocked the trading community, according to traders and other operators of electronic-trading systems. People who know Messrs. Berkeley and Federspiel said they were highly regarded among their peers. Mr. Berkeley was a former president and vice chairman of the Nasdaq Stock Market. Mr. Federspiel once worked at the Los Alamos National Laboratory as a nuclear physicist." Well, we certainly were not shocked, having predicted the demise of dark pools as early as the summer of 2009.  What will shock the trading community, however, even more is if the SEC decides to go after not some tiny unknown firm, but the real dark pool transgressors, the biggest one of which is and has always been Goldman's Sigma X. Of course for that to happen, Mary Schapiro would actually have to do her job. And that, unfortunately, ain't happening.

From the WSJ:

Pipeline Chairman Albert Berkeley and Chief Executive Fred Federspiel agreed to step down earlier this month as the firm struggled to recover from the securities regulator's allegations, which have crippled its trading business, according to a person familiar with the matter. Both men had agreed to pay fines to settle the SEC's complaint. Mr. Berkeley, 67 years old, decided to retire about a week ago, and Mr. Federspiel, 48, resigned Nov. 13, a company spokesman said when contacted Tuesday. Messages left at the listed home numbers for both men weren't returned.


The SEC last month fined a unit of the firm, Pipeline Trading Systems LLC, along with Messrs. Berkeley and Federspiel a combined $1.2 million as part of its settlement, in which the firm didn't admit or deny wrongdoing. The regulator had accused Pipeline Trading, founded in 2004, of profiting ahead of orders clients had placed within the firm's dark pool, a private electronic network that caters to investors who seek to trade anonymously without attracting attention in ways that could move stock prices.


Pipeline advertised itself as a venue that matched investor orders directly, without an intermediary. But according to the SEC, a Pipeline entity called Milstream Strategy Group LLC used streams of information from Pipeline Trading Systems to help predict what shares Pipeline's customers were trying to buy and sell. Milstream in turn made similar trades before filling customer orders in the Pipeline dark pool, the SEC said.


The securities regulator said Mr. Federspiel was directly involved in guiding Milstream to place orders in specific stocks to help inflate volumes within the dark pool, helping to facilitate client orders while also luring new business.


At the same time, he and Mr. Berkeley repeatedly assured current and potential clients in marketing materials and public statements going back at least to 2005 that Pipeline was safeguarding their trades, according to the SEC.

Make no mistake: the regulators know too well just how rigged the game is, and just like back in 2008 Lehman and Bear blew up just so Goldman could take over their fixed income OTC busines, we wouldn't be surprised if this is merely a concerted effort by Goldman, already losing money in all traditional venues, to pick up some point in the dark pool arena, one of the few places where equity flow trading is still profitable, even without inside information.

On the other hand, if this is indeed a crackdown on dark pools by the SEC, and if indeed Sigma X is next, watch out.

And speaking of Sigma X, which revealed clearly and concisely to everyone which country was next domino to fall before Italy was a household contagion name, here are the most actively traded companies in the dark pool as of today.