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The SEC Is Taking a Hard Look at Dark Markets, Except for the Darkest of All – Dark Pools

Courtesy of Pam Martens

SEC Commissioner Allison Herren Lee

SEC Commissioner Allison Herren Lee

By Pam Martens and Russ Martens

On Tuesday, SEC Commissioner Allison Herren Lee delivered an exceptionally well-researched speech on the rising dangers to the broader U.S. economy from the burgeoning dark private markets for non-publicly traded stocks. She makes many important points.

However, there is a far larger and more dangerous dark market: the Dark Pools owned by the serially-charged mega banks on Wall Street that are trading, on a daily basis in darkness, the publicly-traded stocks that reside in public pension funds and the mutual funds that make up the bulk of retirement funds for tens of millions of Americans.

According to an April 2021 report from McKinsey & Company, “global private equity AUM [Assets Under Management] reached $4.5 trillion in the first half of 2020.” That’s the dark market that SEC Commissioner Lee is worried about.

The publicly-traded market in the U.S. stood at $54.768 trillion as of June 30, according to data from the Federal Reserve. That’s 12 times the size of the global private equity market. Which one do you think represents a greater threat to financial stability in the U.S.?

The SEC has admitted to being understaffed and underfunded. Shouldn’t it focus its limited resources on the biggest threats?

It’s not that the SEC hasn’t been put on notice for a long time now that what is going on in Wall Street’s Dark Pools is nefarious, and, highly likely, illegal.

In 2012, Crown Business published the book, Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market, by Wall Street Journal investigative reporter, Scott Patterson. Patterson described the situation in 2012 as follows:

“…pools within pools, all connected electronically, forming a single sloshing pool of dark electronic liquidity. By 2012, the amount of stock trading that took place in dark pools and internalizers [Wall Street banks trading stocks in-house without the oversight of a stock exchange] was a whopping 40 percent of all trading volume – and it was growing every month.

“Even the lit markets were unfathomably complex, run by giant computers that processed secret trading strategies designed by physicists, chemists, Ph.D. mathematicians, AI computer programmers…

“All of that turnover was having a real-world impact on stocks. At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. And by 2011 it was twenty-two seconds, at least according to one professor’s estimates. One founder of a prominent high-frequency trading outfit once claimed his firm’s average holding period was a mere eleven seconds.

“No one – no one – truly knew what was taking place inside the guts of this Frankenstein’s monster of a market.”


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