Industry Leaders Frown on Dark Pool Trend

Traders Magazine ^ | 06/06/08 | Nina Mehta

[TigerLikesRooster]

it would move the price of that stock dramatically, and increase volatility way outside of the normal envelope.

Institutions do not mind going public when volatility is in their favor. Institutions can announce certain big transaction in public when you know doing so would increase value of your stock holding dramatically. However, when going public would trigger unwanted sell-off. they may want to do it in secret in a dark pool.

This may have been going on in the past. However, with sophisticated software backing it up, now its trading volume can markedly increase in volume. There are also more than one such venue. Each does their own transaction and we have essentially one public market and several hidden markets of significant size. They may all set different prices for the same item. Price as market signal lose its function. Market confidence will plummet, because nobody knows exactly what the real price of certain item is. Actually, I suspect this is why they try to get feelers out to other venues(dark or public) to find out what the real price could be.

The long-term consequence would be mistrust of public market. Prices people see in NYSE could be actually a mirage. The public stock market becomes useless.

Besides, being so closed, wouldn't it be easier to conceal certain information from regulators or public?

[ChicagahAl]

“The long-term consequence would be mistrust of public market. Prices people see in NYSE could be actually a mirage. The public stock market becomes useless.”

Yes, quite possibly. However, the public prices wouldn't actually be a mirage, they are still actual retail trades at actual retail prices. But most retail investors are clueless anyway (and I don't say that to be mean-spirited). They simply follow the TV talking heads and newsletter writers, so I doubt that dark pools are on their radar. An intriguing thought would be the possibility that dark pools ultimately replace the public markets, even for retail trades, because they offer a more efficient marketplace and are a good deal for the brokerage firms who operate them.

“Besides, being so closed, wouldn't it be easier to conceal certain information from regulators or public?”

I don't see how that could be, because once the trade is executed it must be reported by the institutional investor to the various agencies based on the laws (SEC, IRS, etc)and to their shareholders. There is no way around that.