Pri­vate stock trad­ing vs pub­lic ex­changes

The Pak Banker - - OPINION - Sam Ma­mudi

DARK pools have a scary name, and to crit­ics they're scary places: pri­vate stock mar­kets housed inside some of Wall Street's big­gest banks. Cre­ated to let big in­vestors swap large blocks of shares in se­cret, they've ex­panded to be­come a sig­nif­i­cant part of daily stock trad­ing. More shares now change hands in dark pools than on the New York Stock Ex­change. Dark pools have helped bring down trad­ing costs. But whether mar­kets as a whole suf­fer when too much trad­ing in­for­ma­tion is pri­vate is some­thing reg­u­la­tors around the world are try­ing to fig­ure out - along with whether some dark pools have been tak­ing ad­van­tage of the dark­ness to fa­vor some cus­tomers over oth­ers.

The U.S. stock mar­ket has frag­mented into 11 pub­lic ex­changes and roughly 45 al­ter­na­tive trad­ing sys­tems, most of them dark pools. Rules to limit dark pool trad­ing have been put in place by Canada and Aus­tralia and the Euro­pean Union is weigh­ing sim­i­lar mea­sures. Crit­ics have com­plained that all traders are hurt by the fact that dark pools don't make or­ders pub­lic but only post com­pleted trades. The pub­li­ca­tion in March of "Flash Boys" by Michael Lewis led to ques­tions over whether some dark pools were de­signed in a way that let high-fre­quency traders place bets know­ing which way the mar­ket was about to go. In June, New York At­tor­ney Gen­eral Eric Sch­nei­der­man filed suit against Bar­clays, charg­ing that it lied to cus­tomers about how much business its dark pool did with high­speed traders and how client or­ders were routed, charges Bar­clays de­nies. The SEC im­posed a $12 mil­lion fine on UBS for vi­ola- tions at its dark pool. And the agency is de­vel­op­ing rules to in­crease dark pool dis­clo­sures and may test a rule re­quir­ing that trades take place on pub­lic ex­changes un­less a sig­nif­i­cantly bet­ter price is of­fered else­where. The NYSE, mean­while, has of­fered to cut trad­ing fees sharply if all but the big­gest or­ders are brought back to pub­lic ex­changes.

Bonds, cur­ren­cies and most other fi­nan­cial in­stru­ments are gen­er­ally not traded on open ex­changes, and there's al­ways been some non­pub­lic trad­ing in the stock mar­ket. Old hands rem­i­nisce about "up­stairs trad­ing," a eu­phemism for pri­vate, large-or­der deals. That was the ex­cep­tion: Since the SEC was formed in the wake of the stock mar­ket scan­dals that led to the panic of 1929, the agency has equated open­ness with fair­ness. Pub­licly shared bids and of­fers mean a level play­ing field, and the rapid shar­ing of price in­for­ma­tion is seen as cen­tral to the mar­ket's role in the ef­fi­cient al­lo­ca­tion of cap­i­tal. Dark pools arose in the 1980s, when the SEC al­lowed bro­kers to bring to­gether buy­ers and sell­ers of big blocks of shares. Their re­cent growth has been driven by elec­tronic trad­ing and a SEC rule meant to spur com­pe­ti­tion and cut trans­ac­tion costs that took ef­fect in 2007. Dark pools can charge lower fees than ex­changes be­cause they are usu­ally just one unit in a larger firm. (Not all the op­er­a­tors of al­ter­na­tive trad­ing sys­tems are banks: Bloomberg LP, the par­ent of Bloomberg News, owns one, Bloomberg Trade­book, which is regis­tered with the SEC.) Along the way, their client base changed. Dark pools are not gen­er­ally venues for big or­ders any­more - one study found that the av­er­age or­der size is now just 200 shares. Dark pools are run in near-to­tal se­crecy. There's lit­tle dis­clo­sure about their rules, par­tic­i­pants or ac­tiv­i­ties.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.