View Full Version : Rise in secret stock trading may be skewering share prices

04-23-08, 03:02 PM
Never expected to start a thread in Rumors, as it is not my style, but this isn't exactly News. The topic of "dark pools" has been mentioned briefly before on iTulip, see my comment here (http://www.itulip.com/forums/showthread.php?p=10554#post10554).

From financialweek.com (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080421/REG/244340545/1036)

A new obsession by big investors with veiling their stock trading patterns is rewriting the rules of the stock market, but some are questioning if the trend, for all its secrecy and sophistication, has created as many problems as it has solved.

The stealthy but rapid growth of off-exchange trading venues, known as dark pools of liquidity, may be playing a bigger role in the market than some expected.

Only a few years ago, investors could count on one hand the number of places to trade stocks in, for example, U.S. companies.

But today traders must navigate a virtual ocean of more than 40 venues to find the best prices—a phenomenon that may be adding to overall volatility and possibly compromising the validity of all stock prices.
As investors found it increasingly difficult to trade discreetly on open markets, the average size of a stock trade on an exchange fell from close to 1,500 shares per trade a decade ago, to just 250 today, Tabb’s Mr. Iati noted. That trend developed at the same time hedge funds and institutional investors found it profitable to make riskier, more leveraged bets at faster speeds, he said.

“Indirectly, you have the market structure changing,” Mr. Iati said. “Now it is much more challenging overall for any investor to make money like they did 10 years ago in the plain-vanilla U.S. markets.”So the risks have grown, especially for small "retail" investors, but I would argue that the available / likely returns have not grown to compensate for the increased risk.

In dark pools, traders looking to buy or sell large blocks of stock get something akin to a wholesale discount.

When investors see a large buy order on a public exchange, they often jump in and bid up the price of the stock, assuming a big trader is making a strong bet about its direction. But if the trader who made the order is still trying to fill it, the price for the stock can move against him, adding to costs.

Hiding the bid from the public markets in a dark pool offers traders the ability to fill an order without suffering the impact of other traders changing the price.

Trades in dark pools are now estimated to account for some 10 to 12% of all stock trades, and consulting firm The Aite Group predicts that by 2011 dark pools will encompass more than 20% of market share in the United States.
NYSE President Catherine Kinney summarized the problem at a 2006 conference, saying every share traded in dark pools was one that did not help the markets determine an accurate price for that stock.

04-25-08, 04:58 AM
it's neither good nor bad, just the way of things. Algorithmic execution is here to stay folks, and not just in equities. FX very much headed the same way now.


04-25-08, 07:24 AM
I think I agree with GJ. As the world becomes flatter and faster, it also becomes more decentralized. Traditional venues and power centers become less important.

04-25-08, 05:41 PM
I think I agree with GJ. As the world becomes flatter and faster, it also becomes more decentralized. Traditional venues and power centers become less important.
Also concur. Look no further than BullionVault to see how to load up your own goldbot to compete against the other goldbots....