Dark Pools and Adverse Selection
by ilene - June 19th, 2010 6:52 pm
Dark Pools and Adverse Selection
Courtesy of Tim at The Psy-Fi Blog
Friendly Highwaymen
Scientists believe that a great deal of the universe is in hiding, being made up of dark matter which, rather inconveniently, refuses to interact with anything else and is therefore almost undetectable. In a similar fashion many stockmarket trades are now being carried out in so called dark pools, where they’re supposed to be similarly undetectable. Unfortunately, despite what many users of them think, you don’t need to construct a super-collider to detect trades in dark pools.
These dark pools are one way for investors to move large blocks of stock without alerting others to what they’re doing. They’re anonymous trades of indeterminate volume carried out in murky corners of the securities industry. As usual the industry argues that it’s doing investors a favour. That’s “favour” in the same way that a highwayman saved his victims from having to carry heavy bags of money about.
Off Market Mechanisms
Now you might think that the very act of trading large volumes without moving the market is a somewhat dubious practice given that the very idea of a market is to ensure transparency through price discovery. However markets don’t so much frown on this practice as positively welcome it. Yet even though dark pools, where private investors are excluded, are expanding rapidly they’re not quite so dark as many users imagine.
In essence dark pools are trading platforms which circumvent the normal stock exchanges. Everything happens off-market and everyone goes to great trouble to avoid publishing trading volumes – it’s not possible to know in real-time, and sometimes not ever, how much stock is being traded (although most trades are published after the event). The rationale behind this is for participants is to stop prices moving against them. Typically, in an open market if you attempt to buy or sell a large block of shares then the price will move up or down in response to this. Much effort is devoted to trying to prevent this happening, dark pools being only one method.
Price Setting on the Dark Side
However, if you don’t have open market price setting there’s got to be some other way of figuring out how to price a trade. Neatly dark pools parasitize open markets by using the mid-price of openly traded stocks. In theory this means that dark…
Stay Safe, Vince Fernando
by ilene - May 19th, 2010 5:09 pm
Stay Safe, Vince Fernando
Courtesy of The Reformed Broker, Joshua M. Brown
Clusterstock has its first embedded reporter and he is currently keeping us posted on the riotous protests in Thailand.
Vince Fernando, one of the better bloggers at The Business Insider, is keeping us updated on the explosive situation in real-time.
Having drinks with Joe Weisenthal a couple of weeks back I was amazed to hear about Vince’s insights into the protests. In retrospect, these were the early rumblings of what has now turned into a full-blown riot, complete with burning stock exchanges and shopping malls.
Here are some of Vince Fernando’s missives from Bangkok. Stay safe, Vince.
Thai Army ‘Live Fire’ Slaughter Zone
All Hell Breaking Loose, Stock Exchange On Fire
Shocking Pictures of the Last Six Hours (yes, of course there’s a slideshow, it’s Clusterstock)