Wednesday, June 24, 2009

Dark Pools or The Creature From the Black Lagoon

Obama’s SEC has suggested that we need to do something about Dark Pool trading or the trading of large blocks of stocks through unregulated and secret exchanges. Who is doing this? Most of these exchanges are being operated by the same big banks we all heard about last year being bailed out after all the unregulated and secret exchanges of Credit Default Swaps.

Basically these markets exist to permit insider trading and gaming of the system that was the reason we went to highly regulated and transparent markets a hundred years ago. As these Crossing Networks (the other name for these markets) gain volume; now about 10% but they could easily jump to 50%; they increasingly make the published prices of stocks irrelevant. They also increase the tendency of public markets to make wild swings as daylight traders try to guess the "real" market price. Will what’s left of the economy be dragged under in the Dark Pool?