Dark Pools - End of Trading As We Know It?

Actually, that's not quite true. Here's some more detail:

"The attraction of these dark pools is clear. If an insurance company, for instance, wants to unload 1 million shares of Deere & Co., it traditionally would have to phone its broker, who would then have to contact the floor of the New York Stock Exchange, and in the process information about the institution's intent to sell would begin to leak out to other traders. Presumably, the shares would come under pressure, and the seller would end up receiving less money for his stock.

The problem is that in using the dark pools, there is little way for sellers to assess whether they have received the best possible execution on the order. Although by law the participants have to print the trade on one of the exchanges, the information is after the fact, and not especially revealing.

This is especially the case if the broker has "internalized" the order. This popular activity allows brokers to match the order within their own shops, operating beyond the vision of other dealers and outside the spotlight of the SEC. Though internalization has always taken place, the development of crossing networks has greatly expanded the in-house opportunities.

This has an impact on the average investor by shrinking the amount of trading that is being funneled through traditional channels, and which is available for filling the orders that such small investors place through their brokers. That is, it reduces liquidity and transparency in the marketplace for the small investor, while enhancing it for the big players. Less liquidity means less opportunity for "price improvement," wider spreads, and, ultimately, more costly executions.

Also, over time, internalization will mean a continued consolidation in the brokerage industry. Those firms such as Goldman Sachs that have giant order flows already are obviously best positioned to fill orders in-house. They profit off a spread between the price they paid for a stock and the price they charge the buyer. While initially they are likely to seek narrow spreads so as to attract business, if there is a fall-off in the number of competitors, the spreads will likely widen."
 
So Don, how about sharing a little industry knowledge on how dark pools and things like iceberg orders work since you are resident expert?

My understanding is that while delayed those orders do get reported completely to the tape?

I was told by someone that trades Eurex there are a number of "off balance transactions".
 
Quote from ShoeshineBoy:

.....This has an impact on the average investor by shrinking the amount of trading that is being funneled through traditional channels, and which is available for filling the orders that such small investors place through their brokers. That is, it reduces liquidity and transparency in the marketplace for the small investor, while enhancing it for the big players. Less liquidity means less opportunity for "price improvement," wider spreads, and, ultimately, more costly executions.

Also, over time, internalization will mean a continued consolidation in the brokerage industry. Those firms such as Goldman Sachs that have giant order flows already are obviously best positioned to fill orders in-house. They profit off a spread between the price they paid for a stock and the price they charge the buyer. While initially they are likely to seek narrow spreads so as to attract business, if there is a fall-off in the number of competitors, the spreads will likely widen."
More...

Thanks for finding the article.

There you go. The ones moving billions, as always, are finding advantages, while the little loser public gets scrooged, while the SEC does nothing but let it grow, probably until there are enough little losers complaining, and then only appear to do something about it.
 
The 7/26/08 issue [The one with "Rocket Racing" on the cover] of New Scientist has an interesting article on Dark Pools.

In fact, I highly recommend this entire issue be read from cover to cover, if your interests are deeper than simply trading.

I would post the article here, but I have the online version and it is a pain to get the text [and it probably infringes on copyright laws - spend the $4.95]

http://www.newscientist.com/home.ns

"Investors head into the darkness to sell stocks"

nitro
 
Quote from dandxg:

So Don, how about sharing a little industry knowledge on how dark pools and things like iceberg orders work since you are resident expert?

My understanding is that while delayed those orders do get reported completely to the tape?

I was told by someone that trades Eurex there are a number of "off balance transactions".
More...

All the dark pool trades get reported within 30 seconds I'm told by the officials.

Not sure if I posted this info up yet:

http://www.redi.com/forms/algo720.pdf

http://www.stocktrading.com/sigmax.pdf

And, basically, if we use the SigmaX smart router it will go search the dark pools between NBBO pricing and snag price improvement when availiable. We can also post there as well. For example, if bid is .05 and offer is .09, we can send smart sell order and it might very well hit a .07 bid. We can post between bid/offer as well. As always, as in iceburg orders, we can "display" 500, but have a 5,000 share order. This is another reason why tape reading is still so important to trading.

If you guys have specific questions, please post them, maybe I'll add the Q&A to my TASC column(s).

And, BTW, the post with reference to traders "finding out" about a million share sell order from an insurance company or anything, well, I'm not saying "some" might find out info, but it's still illegal to act on this information....I'm not naive enough to think things like that don't take place, but the dark pools "should" actually help with this via pre-negotiated trades, just like the old days.

Glad to help....

Don
 
Quote from Don Bright:

All the dark pool trades get reported within 30 seconds I'm told by the officials.

Don
More...

Don,

I've posted a reference to an SEC document a while back that asserted something to the fact that trades can get reported and settled after hours on overseas exchanges. Not that it specifically refers to dark pools, but nor does it exclude them (from my understanding).

Do you agree with that assertion? If so, how do such records get reflected in the tape, and wouldn't a sufficient amount of these methods of recording transactions distort things like chart volume over the course of time?

Thanks,
dt
 
I called a couple of "dark pools" a few of them said they had up to 90 seconds to report and one said they had up to 5 minutes to report. I am very surprised Mr. Bright.. that you of all people who have been in this industry for a long time would actually believe what you are reading!? Naked short selling has been illegal for a long time yet it was never truly enforced. Position limits in futures with index funds etc are not enforced. Nothing is ever inforced for the big guys.. the guys paying huge commissions to the regulators and brokerage houses every year. The NFA the sec fees etc. Think about it. These agencies need cash to operate and expand. The governemtn is not going to give it to them so they are like a brokerage ..the more trades made the more transactions the more money they have to pay workers and put into the 40k plans etc. It is serioulsy a conflict of interest ... i liken it to a doctor who looks at a patient who gets 1 cent every time the patient takes and aspirin. He might say take 5 a day when the patient only needs 1! No one ever enforces anything until it blows up in everyone's faces.
MY POINT IS that there is no way in hell the sec or anyone else keeping tabs and watching how when and where the dark pools are displaying their trade prices and volume. To me this is the same as block trading where the public isn't privy liek at the ICe in crude oil.. but it happens and it is going to happen in the future. i THINK ALL OF THIS IS LEADING TO A DYNAMIC SHIFT IN THE WAY INDIVIDUALS INTRA DAY TRADE STOCKS AND FUTURES. It will make any edge so small that most people will have to throw the towel in and be in the trades more for the long haul than for the day. The markets are getting more noisy every year.. and volume at price is inaccurate. It is going to render scalping and even using 1 and 2 minute charts useless...eventualy. Just my opinion... oh yeah and i think in ten years the algo's and brainiacs will be toast and most hedgies and money managers will go back to looking for value etc.
 
OK, in response to both the above posts. Let's take a step back and "follow the money" for a second. These transactions have to actually settle, and/or deliver certificates (rare, but is still done).

For the cash to move from one place to another, the transactions have to be matched and offset (contra) by both exchanges and clearing firms. So, there will have to be a record kept of all the transactions. Are some trades "posted" off shore? Sure, but there are pretty strict rules in place, and they too have to "settle" and be paid for or else the people selling the shares can't get their money.

As far as a dynamic change, possibly, but I really don't fear that anything in the next few years will affect the way my people trade (other than the regulatory intervention, pre-borrows, and all of that).

I have been pretty involved for 30 years, and the "they" that many refer to, has actually been "us" in many regards. There will always be those trying to bend the rules, but since we are in a global, computerized world, I think the ability for more transparency, not less, especially when "following the money" will keep most of this in check.

And, as I mentioned, many of our guys are making good money using the dark pools.

Now, in regards to the "naked short selling" yes, there has been too much "slack" in this regard. The rule is, at this point in time, that the Clearing firms have 13 days to locate and borrow the stock required for their members...which is a lot of leeway in my opinion. Clearing firms can and do buy in the shorts on many occassions as well. The latest "test" of the 19 Financials require a same day delivery of shares, thus prompting us to pre-borrow vs. locate shares.

I'll admit there is a lot of action by the regulators and the firms these days, and hopefully all will be sorted out sooner than later.

FWIW,

Don
 
Thanks Don, and all that responded with feedback, definitely interesting stuff even though I currently only trade futures.
 
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