Courtesy of Pam Martens.
There’s no question that there’s a lot of sharks swimming about those dark pools being run by the mega Wall Street investment banks which are operating as privatized, unregulated stock exchanges operating in the dark. Any hopes that Wall Street’s captured regulators are going to harpoon those sharks anytime soon were dashed on July 1 when the Financial Industry Regulatory Authority (FINRA) announced a bizarre settlement with Goldman Sachs over misconduct by its dark pool, Sigma-X. The settlement popped up out of the blue three years after the alleged trading violations were documented by FINRA and the settlement was so devoid of facts as to create its own dark curtain around an already opaque arena.
As is typical, FINRA made the sweeping claim in its press release that “In today’s highly automated trading environment, FINRA has no tolerance for firms that fail to have robust policies and procedures to protect against trading through protected quotations.”
Based on the few details we could extract from the settlement document, FINRA has an enormous tolerance for dark pools that deny their customers a fair execution on their trade.
According to FINRA (which you should know is a self-regulatory agency with financial industry representation on its Board), its staff in Market Regulation conducted an investigation of Goldman Sachs’ dark pool, Sigma-X, from July 29, 2011 through August 9, 2011. Keep in mind that’s only eight trading days. The investigators found that the dark pool denied its customers a trading price equal to the National Best Bid and Offer (NBBO), which is what they are required to do under law, on 395,119 transactions.
FINRA does not tell us the most important detail about these transactions; how far off from the proper trading prices were these 395,119 trades? Are we talking about 5 cents or 50 cents or more than that? Neither does FINRA give us an idea as to what percentage of all trading done by Sigma-X in that eight-day period these improper trades represented.
FINRA has just in the past four weeks, apparently under pressure from the revelations in the Michael Lewis book, Flash Boys, begun to release the weekly volume of trading done in dark pools. For the most recent week reported, the week of June 16, Goldman Sachs shows 955, 636 transactions for the five-day week. Extrapolating that to an eight-day period would mean roughly 1.5 million transactions. While there is no currently available public data for total transactions in Goldman’s dark pool in 2011, if it was doing comparable trading to now, the 395,119 trades that were bad trades would represent more than a quarter of all trades. The public has a right to this information in order to put the conduct in proper context – and FINRA failed to provide it.
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