Dark Pools Pervade Wall Street

By: Money_Morning

Shah Gilani writes: I’m not usually the kind of guy to say, “I told you so.”

But you know what? I’m saying it.

I told you so.

Dark pools – private markets unavailable to the public – and high-frequency trading are manipulative schemes run amok.

They weren’t always. Both were the result of unintended consequences. But that’s all behind them. In front of them now are civil and criminal lawsuits.

Late yesterday, New York State Attorney General Eric Schneiderman charged Barclay’s PLC with fraud over how it markets its dark pool and how it operates it.

In a press conference yesterday after the market had closed, the AG said, “Barclay’s dramatically increased the market share of its dark pool through a series of false statements to clients and investors about how and for whose benefit Barclay’s operates its dark pool. Contrary to Barclay’s representations that it implemented special safeguards to protect clients from aggressive or predatory high frequency traders, Barclay’s is accused of operating its dark pool to favor high frequency traders.” But that’s not all Barclay’s did. Keep reading, and I’ll explain all…

Diving In

Barclay’s not only omitted pertinent information and facts about high-frequency traders’ (HFT) access to their dark pool, but they falsified written material and presentation slides in a way that smacks of blatant fraud.

The promised protections were missing, among them limiting “predatory” players from the dark pool. And Barclay’s also allowed anyone into the dark pool.

Far worse, their own HFT desks were in the pool picking off clients.

The marketing material was obviously influential in attracting clients. Barclay’s dark pool became the largest in the United States. There are some 50 dark pools operating in America – that’s on top of 11 public exchanges.

And you can bet your bottom dollar there was money involved. According to market research firm TABB Group, the top three dark pools operated by Barclay’s, Credit Suisse and UBS earned about $800 million in commissions in 2013.

That’s just commissions, folks. There’s no clarity on how much they made on their high-frequency trading, much of which was earned by reading their clients’ dark pool orders and front-running them. My guess is that they made billions off their dark trading.

There are going to me more charges against more dark pool operators because they pretty much all work the same way. It’s how the game is played. What’s staggering to me is the stupidity of institutional money managers who go into these dark pools not understanding what the game is and how they’re being teed-up.

As a result of what’s coming to light (they should have just been reading my stuff all these years), money managers, on behalf of “the public” whose money they manage, mutual fund managers, pension asset managers, and hedge funds, too, are going to sue for the billions they’ve lost to this hand-in-glove scheming.

It’s hand in glove because these money managers get you into their dark pools to protect you from high-frequency trader access and then front-run your orders.

They themselves are the wolves in the henhouse.

Maybe, just maybe, the end result of this will be that some of the inequities that have built into the market systems we believe (well, not me, I don’t believe) are fair and orderly and transparent might just become more so.

We all better hope so, because it’s not just about fair and transparent. It’s about how the market has been undermined and how it could collapse one day, literally, and trillions of dollars could be lost in a matter of days. And worse, whatever remaining confidence people have in the markets would evaporate and devastate U.S. capital markets and the economy.

If these schemes aren’t wiped clean, and the market crashes because of the mechanical mayhem inherent in the operating machinery that we rely on, don’t say I didn’t tell you so.

Editor’s Note: Shah is appearing on WBUR‘s On Point With Tom Ashbrook this morning, starting at 10 to talk about dark pools. That’s 90.9 FM in Boston, but visit here to listen online or to see if your local National Public Radio (NPR) affiliate also carries On Point.

Source : http://www.wallstreetinsightsandindictments.com/2014/06/dark-pools-pervade-wall-street/

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