5.9 C
New York
Friday, March 29, 2024

Dark Pool Warfare Is Now Official As Investment Bank Dark Venues Begin To Report Trading Data, Even As Third Parties Clamp Down On Disclosure

Courtesy of Tyler Durden

Following an ongoing outcry over opacity in the dark pool markets, a topic discussed to death on Zero Hedge, six investment banks have finally started providing some modicum of transparency into how much trading actually occurs in their dark pool venues. Today, MarkIt will start disclosing European trades matched in the internal crossing engines of Citigroup, Morgan Stanley, Credit Suisse, JPMorgan, UBS and Deutsche Bank. The first ever report of this kind can be read on the following MarkIt site. The data will be published on a T+1 basis. As MarkIt notes, “The aim of the Markit BCS (Broker Crossing System) product is to provide the market with greater visibility of the total volume crossed within their systems by the reporting brokers.” Europe is a good place to start with such disclosure, as estimates on European dark pool trading are extremely wide: as Bloomberg notes, “The U.K.’s Financial Services Authority says the pools account for 1.25 percent of trades, whereas the Federation of European Securities Exchanges, which represents exchanges, estimates the figure is closer to 40 percent. The lack of reliable information on volumes and pricing of securities in dark pools has posed a problem for regulators trying to keep pace with market innovation.” Curiously, this major development in dark pool opacity comes on the heels of the announcement that non-investment bank dark pools, those of Chi-X and BATS, will curb market data disclosure. Again Bloomberg: “Chi-X Europe Ltd., the region’s biggest alternative stock-trading system, began suppressing some market data from its dark pool after customer concern about information leaks led to a decline in business. Starting today, London-based Chi-X Europe will no longer disclose customer identification or order numbers in Chi-Delta, its dark pool. Bats Europe, the second-largest multilateral trading facility, will impose similar controls on May 24.” We believe this is a byproduct of accelerating cannibalization between investment bank and 3rd party ATS venues (not to mention dinosaurs such as NYSE-ARCA), as margins continue to dwindle in the rapid evolution to a zero margin trading business, be it exchange or dark pool based. In their pursuit of the fastest, biggest, newest, market participants are destroying each other in the process, and further destabilizing market structure in the process.

Bloomberg notes the plunge in dark pool trading on the back of worries about data leakage following the Themis Trading white paper on data leakage which we posted previously.

The move comes after customers said they are concerned that identification could lead to others guessing their trading strategy and follows a May 11 report from U.S. brokerage Themis Trading LLC titled “Exchanges and Data Feeds: Data Theft on Wall Street.” The value of trades on Chi-X Europe’s dark pool plunged 61 percent to 118.7 million euros ($148 million) in the seven trading days after the report was released.

And now that Themis’ caution about market structure is being validated left and right, we would like to leave you with this editorial by InvestmentNews on High Frequency Trading, which recapitulates all the issues hammered repeatedly by both Zero Hedge and Themis since about April of 2009.

High-frequency trading merits close examination

The May 6 “flash crash” revealed an area of the financial markets that isn’t touched by the financial-reform bills in Congress but nevertheless must be examined. It is the -shadowy world of high-frequency trading, in which 100 to 200 firms use computers plugged into the nation’s stock exchanges to trade in and out of stocks, index futures and exchange-traded funds in fractions of a second, gleaning tiny profits from each trade.

The exchanges offer rebates to the high-frequency traders for volume, adding to the profits of the firms.

High-frequency trading is the antithesis of investing, which is putting money to work for the long run. And the combination of high-powered computers, sophisticated software programs and close connections with the exchanges appear to give the firms engaged in it a significant advantage over conventional investors.

The tiny profits that the high-frequency traders make on each trade come from the pockets of other investors.

Many investors and market watchers already had been skeptical of high-frequency traders before the “flash crash,” but the sudden market plunge that day has made them even more uneasy about the activities of these traders.

High-frequency traders, and some exchange officials, claim that the traders actually help the markets and other investors by providing liquidity, ensuring that those investors can buy or sell whenever they want.

But that claim rang hollow May 6, because when the market turned down after a large, bearish S&P 500 futures trade, the high-frequency traders shut down their computers, withdrawing that liquidity when it was most needed.

The withdrawal of the high-frequency traders from the market caused prices to drop precipitously because sellers far outnumbered would-be buyers. That apparently caused a cascade of automated sell orders across the exchanges.

Unlike the specialists on the floor of the New York Stock Exchange, the high-frequency traders are under no obligation to continue trading when stock prices drop.

Of what use is the liquidity supposedly brought to the market by the high-frequency traders if it disappears at the first sign of trouble? If providing liquidity is the justification for the profits that they earn from their activities, then they haven’t earned them.

Sen. Edward E. Kaufman, D.-Del., is right to call for the Securities and Exchange Commission to investigate high-frequency traders and the impact that they have on the markets.

The SEC must identify high-frequency trading firms and undertake a serious study of whether their activities are helpful or harmful to the markets. If they are found to be inimical to the smooth functioning of the markets, if they increase volatility rather than smoothing it, their activities must be curbed.

Last week, the SEC filed a proposal to halt trading if individual stocks swing by more than 10%.

Although the proposed individual stock circuit breakers may alleviate the immediate problem, they won’t eliminate all concerns.

The activities of high-frequency traders May 6 harmed investor confidence. Individual investors won’t return to the stock market until they are sure that the markets are fair and that others aren’t profiting at their expense.

 

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,450FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x