Thursday, October 22, 2009

Dark Puddles

The SEC has finally cracked down on dark pools, limiting the amount of trading that can be kept quiet to 0.25 percent of a company's shares, from the 5 percent previously. This is a good first step. It means that traded prices have to be made public sooner. There have been calls for greater transparency for dark pools since their beginnings. Some of the largest pools are owned by investment banks where they began as internalization engines. While this saves millions in brokerage and exchange fees for the banks and their customers, it also means that no one else can play. Some of the banks have allowed other dark pools to integrate with their own. Last year Morgan Stanley signed bilateral deals with Goldman Sachs and UBS to do just that. But access remains limited to a few chosen partners. Broker-owned dark pools and crossing engines have been struggling for years to get the banks to cooperate and allow mutual access. To add murkiness on top of opacity, volumes in dark poolshave been reported in two different ways. The sellside pools often double-count the trade, whereas the independents usually count a trade once. Some pools allow trades of any size, some insist that a client do blocks of 70,000 shares or more. The disparity between, and secrecy from, many dark pool operators has kick-started the SEC's new campaign for transparency. The new chairman of the SEC, Mary Schapiro, seems to be doing what Gary Gensler's CFTC cannot - kicking ass. The SEC is not cowering from the task because the US exchanges or banks might lose business. And they might - Europe is gearing up its post-MiFID markets with several dark pools of its own. And quality volume in a sector can already be found in European pool, satifying an investor's every desire even if it isn't in a US listing. Maybe what it takes is a woman. When a woman is confronted by whiny little boys who want to keep potentially dangerous toys, she usually tells them to shut up and find some other toy to play with.  That the boys - investors, banks, etc. - may have to go overseas to find these toys is neither here nor there. She just doesn't want them doing it on her watch and in her patch.

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