Dark Pools - End of Trading As We Know It?

Discussion in 'Trading' started by ShoeshineBoy, Jul 29, 2008.

  1. The last ten years have been great for trading in many ways. Places like IB have opened the doors for the small guy to get instant and powerful access to the exchanges. The barriers to entry fell like the Berlin Wall and we all thought we were in trading Nirvana.

    Well, the pendulum appears to be swinging back quickly. The big boys no longer want open markets apparently. There have been several threads on et discussing Dark Pools. But there are estimates that up to 50% of the market trades may be completely hidden from the public and executed through these dark pools in just a few years.

    This link


    discusses how rapidly these dark pools are growing

    "This is something the stock exchanges don’t want to see because it strips them of order execution revenue. Which is why they’re getting into the game, too. At the present time, the Nasdaq (NDAQ) alone shunts some 18% of its volume - or roughly 350 million shares a day - through what insiders euphemistically refer to as its "non-displayed platforms," and also has struck a deal with five unnamed Dark Pool operators that are rumored to route nearly half of the total Dark-Pool volume in the United States today.

    NYSE Euronext (NYX) plans to connect up to 30 such pools, so don’t think for a New York minute that this isn’t a global phenomenon - Dark Pools exist all around the globe.

    We’re still in the early days of this movement. That means there are still lots of things to be worked out from a technical standpoint. For instance, there’s very little in the way of proprietary software that enables any Dark Pool operators to "talk" with their competition.

    But we think that’s going to change in a real hurry in the next few years, when as much as 50% of all U.S. trading volume will be handled by "Dark Pool Alliances.""

    So forgot the volume you're seeing on your charts! And quit thinking that all your backtesting will do you any good. Everything is changing and probably for the worse. Consider these impacts from the above link:

    "First, as more volume moves to the so-called Dark Pools, the very notion of what constitutes "public pricing" becomes suspect. Practically speaking, if we’re seeing only 50% of the trading volume in a given stock, who’s to say that the pricing we’re seeing is accurate if the other half remains a mystery.

    Second, the small- and mid-cap stocks that for so long have been the domain of smaller investors will likely become harder to trade. The reason: Dark Pools will absorb the liquidity that’s presently out in the open, just as a "black hole" in outer space sucks in all the matter that’s nearby. The net effect could be that smaller transactions become more inefficient, or that public pricing actually disconnects from private pricing. Either way, individual investors may not get the best possible prices."

    So are we doomed? Are all us little guys going to be squeezed out?
  2. Well now....

    Captive "public markets " ?

    Even a politician may understand this is not cool....

    But here again.....
  3. Who cares. Do these clowns really think were going back to booming asset markets anytime soon?

    They'll dump a zillion dollars into this crap and in five years the sp will be sitting at 500 and trading volume will be half of what it was now.
  4. Dark pools are bad for the free market or open market system.

    If those sellers are so paranoid that the price or volume that they advertise would crash the price. they will have no bids.

    if i know the seller is desparate to sell the bids would disappear and you'll get a bigger price crash.

    if buyers and sellers have no confidence that the pricing or market is fair and orderly you'll get less participation or liquidity.

    a market without liquidity or open information will crash.

  5. market makers won't participate in the open market for the shares.

    if some transactions are not listed or known.

    information is valuable in the market.

    hidden price, hidden identity of transacdtions...just shut down the publicly listed market and get delisted.

  6. public market displays no volume

    but in the backroom or dark pool you have 1,000,000 shares sold. or covered or downtick.

    you'll get more volatility..like 25% min. spread on stocks.

  7. if mr. market is fooled he'll just have bigger 450% spreads and no volume. you might as well delist the stock from the exchanges.

    as price and volume of transactions is not known

  8. 50 % in a few years and what are present estimates ?
  9. 50% spread intra-day.

  10. C'mon guys - give me a break.

    Where I come from, inefficient pricing = opportunity for traders.

    Either way - Reg NMS still exists, which means that if a print is going to occur on one of these dark pools, the pool still has to ensure that there is not a better price available elsewhere. If there is, they have to take that liquidity first.

    No matter what happens in the future, one thing I'm sure of is there will be plenty of opportunity for those willing and able to adapt.
    #10     Jul 29, 2008