By Lucy Komisar
Oct 8, 2012
Books: Dark Pools by Scott Patterson
Crown Business/Random House
I always knew I should not invest/gamble in the stock market, and Scott Patterson has told me why. I always thought the system was rigged, gamed by the insiders, and Patterson, a Wall Street Journal reporter, has described that in Dark Pools in fascinating detail.
Did you think the stock market was about companies of good value raising capital because investors knew that the good value meant that their shares would be easily tradeable? And would likely go up in value? Because people who studied companies knew they were doing a good job?
Forgetaboutit.
Patterson shows how that trading logic has been changed by dark pools, by which he means not just the insider trading venues that mask buy and sell orders from the public market so they can‘t see orders. Dark pools are run by the major banks/ broker-dealers, and only their big-time-spender members can see the orders.
He argues that “the entire United States stock market has become one vast dark pool. Orders are hidden in every part of the market. And the complex algorithm AI [artificial intelligence]-based trading systems that control the ebb and flow of the market are cloaked in secrecy. Investors”and our esteemed regulators”are entirely in the dark because the market is dark.”
A lot of the book is about the evolution and impact of computerized high-frequency trading (HFT), now running from 50 to 70 percent of market volume, depending on whose statistics you believe. These computers trade on nano-seconds, front-running anything you or your broker can do. And “spoofing” trades, which means they order a buy or sell and immediately cancel it. How‘s that for market manipulation! Hey, SEC, why do you allow it?
In fact, finally, after a Knight Capital computer-instigated “flash crash” roiled the markets in August, the SEC says it will look into HFT. Some European market regulators are considering restrictions. Don‘t hold your breath in the U.S. where the SEC is pretty much the lapdog of the giant trading banks.
But read Patterson‘s book to see why you shouldn‘t invest in the market.
TRUE. “Market Fragmentation” is one of the tags (buzzwords) around this concept. It goes hand in hand with HFT (another buzzword) “high frequency trading”. The two feed on each other!
Markets fragment ===> same security trades on different venues.
Natch, it will have different prices at any given point of time.
Enter HFT arbitrage. The two processes feed each other hand in glove. Really this is how Goldman reported a FULL QUARTER of no trading-loss days (NONE!). Subsequentlyt, another bank reported the similar no-loss result in 2011 i believe!
Same thing with ETFs engaging in “delta-one” arbitrage.
All of this is about printing money, almost literally, Risk Free.
It’s NOT rocket science but it’s couched in rocket science scenery.
I don’t invest in retail/muppet/chump stock market either. Not safe at all.
PS. they (the financial complex) lovingly call this “providing liquidity”. support your troopers!!