There is also this from Matt Taibbi http://trueslant.com/matttaibbi/2009/10/27/goldman-lobbies-senate-says-full-transparency-sucks/ Oct. 27 2009 - 11:58 am | 5,965 views | 4 recommendations | 39 comments Goldman Lobbies Senate, Says Full Transparency Sucks ALTERNATIVE TRADING PLATFORMS AND THEIR EFFECT ON LIQUIDITY The equity markets provide perhaps the best example of a highly evolved complex ecosystem, where care must be taken to preserve the benefits that have evolved from competition and innovation⦠Crucially, liquidity is what helps to solve this mismatch problem. Market makers that see large volumes are best positioned to match differing size transactions. In traditional exchange trading, bids and offers are public, and this transparency helps buyers and sellers to achieve the best price. For some market participants, however, the openness and transparency of the equity market actually mean they are unlikely to achieve the best price. The risk, particularly for large transactions such as those undertaken by pension funds or large mutual funds (where most small investors have most of their equity exposure), is that other market participants will use this transparency to undercut the intended transactions. From a Goldman Sachs lobbying document (emphasis mine) effective-reg-part-4.pdf (application/pdf Object). This is from a lobbying document Goldman has been passing around the Senate on financial regulatory reform in general. There is a lot of crazy stuff in this document, but the most notable is probably this passage, in which Goldman pooh-poohs the notion that complete transparency in markets creates accurate prices. Instead, the bank argues that an over-the-counter market in which big traders like Goldman get to do deals in the shadows in âdark poolsâ without the retail investor having any knowledge of what the hell is going on is somehow better for everybody, that this somehow produces better prices. Of course the reality is that the two-tiered system creates one pool of fools whose every movement is visible to every animal on the Serengeti, and another pool of giant bloodthirsty carnivores who get to walk around invisible, picking off the dik-diks one by one. Everyone I showed this to had the same reaction â âI canât believe they said this out loud.â One friend of mine put it this way: say Goldman buys a big block of stock from a pension fund in a dark pool. Now they have shares they want to get out of and flatten out their risk. So where do they sell? Well, a big chunk of it might go to the retail schmuck who has no idea whatâs going on. Heâs buying 1000 shares of whatever at $28, not knowing that Goldman has another 50,000 shares to go. Next thing you know, the schmuckâs shares are at $27. Goldman salutes this process, noting the magic of so-called ânon-displayed liquidity.â What the rest of us would describe as âhiding shit from the rabble,â Goldman calls âseparating liquidity from information about the transaction.â You almost have to admire the sheer balls of this sort of propaganda: God bless this company. Theyâre never boring, thatâs for sure.
This whole thread is idiocy. Dark pool transactions happen at the same NBBO (the same price as the "regular" markets.) If a large investor wants to sell a block of stock that would drop the stock if they just dumped it on the NYSE, why not see if they can cross it in a dark pool and meet a buyer there? Taibbi is obviously an idiot... If you're worried about all the HFT traders (his last brilliant article), why would you not want to be able to hide your order flow in the dark pools which HFT algos can't access? Please be consistent if you're going to complain about things people! lol
for every million share crossed in the dark pool , there are 2 sides, there is no reason the shouldnt have to peice it out and test the waters just like everyone else, this all started when banks were shuffling currencies and the exchanges didnt have big enough players to accomodate them, the banks would and still do ,just cross them, can you imagine the amount of currency that is exchanged between global banks everyday, pushing over into the stock market was never necessary , there has always been enough liquidity in the exchanges for this
What happens with the small trader (regular market) if they (buy), THEN a big block is trade in the dark pool for lower bid price?
The Nazi takeover of Austria in the mid 1930s was actually financed by a situation similar to the current AIG and large investment banks (or maybe more Madoff) melt down. Phoenix Insurance company that was the largest Austrian life insurance company was milked to provide the funds to finance the Nazi party in Austria around 1934. The story is documented in the magazine Math Intelligencer June 2004 issue by the quants of the day. The mathematicians who did the quant work for the insurance company left records explaining the blow up and bankruptcy of Phoenix Insurance and use of the funds. There was trading and it was kept secret.
You make some good points. Another issue is, who "owns" the information about the fact that a large mutual fund wants to sell 10 million shares of a given stock? By putting the order in a visible market, they would be "giving" this info away for free. Why should a mutual fund give the trading community free info that can be used against the fund? On the other hand, with the (apparent) high quality of algorithms available to buy siders these days, there's no reason why they can't just split their order up into many pieces and cross it over time.