Entries Tagged 'dark pools' ↓
December 4th, 2013 — The Market Structure Map
I’m reminded of a joke (groans).
A man is sent to prison. As he settles into his captive routine he’s struck by a midafternoon affair among his jailed fellows. One would shout out, “Number 4!” The others would laugh.
His cellmate, seeing the newbie’s consternation, explained: “We’ve been here so long we’ve numbered the jokes instead of saying the whole thing. Here, you try. Number 7 is a really funny one.”
“What, just shout it?”
The cellmate shook his head. He said, “Some people just can’t tell a joke.”
Speaking of numbered jokes, the NYSE filed with regulators to offer new order types – regulated ways to trade stocks – designed to attract large institutional orders now flowing to “dark pools,” or marketplaces operated by brokers where prices aren’t displayed. The exchange has long battled rules in markets that promote trading in dark pools, arguing that these shadowy elements of the national market system inhibit price-discovery.
Let’s translate to English. The NYSE is a big stock supermarket with aisles carrying the products your equity shopper needs, where prices and amounts for sale are clearly displayed. Across the parking lot there’s an unmarked warehouse, pitch black inside, with doors at both ends.
You can duck into the supermarket and check prices and supplies for particular products, and then hurry over to the warehouse and run through it holding out your hands. You might emerge with the products you wanted at prices matching those in the supermarket. Continue reading →
July 17th, 2013 — The Market Structure Map
There’s apparently a reality TV show called “Dating in the Dark.”
It must lack the cachet of Survivor or The Bachelor because you don’t hear much about it. The gist is that a number of people of opposite sexes wander around in utter blackness falling in love. You wonder how that’s superior to the displayed market – so to speak.
But in the equity market, dating in the dark is a big deal. I’m talking about how stock orders find each other. Take Coca-Cola (KO), which reported yesterday. From July 8-12, according to Fidessa’s Fragulator, 25.6% of trades occurred on KO’s listing exchange, the NYSE. But 29.4% were on the FINRA NYSE tape, a reporting facility for trades between brokers rather than on exchanges.
The remaining 44% of KO’s trading mostly met in displayed markets at the Nasdaq, BATS and Direct Edge, and the NYSE’s derivatives-centric platform called NYSE Arca, formerly the ECN Archipelago.
Why does this matter to you, IR professionals? It’s important to understand what’s happening. This is the market you manage – the equity market for your shares.
So, FINRA – the Financial Industry Regulatory Authority – is trying to address concerns that a large amount of stock-dating in the dark is bad for markets. That volume of KO’s on the FINRA NYSE tape? It’s “dark pool” trading, where buyers and sellers meet secretly and anonymously through brokers acting like millionaire matchmakers.
Last week FINRA sent a proposal to its members that would create new reporting rules for dark pools. If adopted, alternative trading systems, or facilities where the principal function is matching trades but the regulatory structure is one for broker-dealers rather than the regime exchanges operate under, would report their trades to FINRA on a delayed basis using a unique market-participant identifier. That way, FINRA would know what trades and volume occurred in each facility to better identify market-manipulation. Continue reading →
May 8th, 2013 — The Market Structure Map
If you appeal a parking ticket to the Parking Department, what’s your expectation of objectivity? The Parking Department collects revenues.
Which brings us to word circulating last week from CEO Duncan Niederauer that NYSE Euronext and other exchanges are confronting the growing problem of off-exchange trading. “It impacts the quality and integrity of the U.S. capital market – and ultimately the ability of markets to enable companies like yours to raise capital efficiently,” Niederaur wrote in a letter to issuers (which a variety of alert readers passed along to me).
Shouldn’t we first ask why money has fled displayed markets? Private equity is working great. It’s a non-displayed market. Pensions and endowments have nearly twice as much money in private equity than public equity today. Investors aren’t forced to transact off the exchanges. They choose to.
Now exchanges want regulators to herd them back to displayed markets…for your good? Or for theirs? There’s a biblical proverb that says, “The first to present his case seems right, until another comes forward to question him.”
I think fragmented markets are a problem. But the reason the NYSE and other exchanges want trading between brokers to move back to exchanges isn’t for capital-formation purposes. It’s because the NYSE and other exchanges are data and technology vendors. NYSE Technologies last year generated $473 million of revenue supplying data, circuits and technologies to those trading your shares. Continue reading →
January 9th, 2013 — The Market Structure Map
What surprised me most was how twice as many people knew “high-frequency trading” compared to “dark pools.”
The Nasdaq’s Mike Sokoll, Liquidnet’s Nicole Olson and I kicked off a session on how equity markets work at NIRI’s conference on IR fundamentals in Santa Monica yesterday. As we were unfolding the map of market behavior, we polled the audience:
How many of you have heard of “high-frequency trading?”
It appeared to me that two-thirds of the hands in the room went up, and there were between 80-100 investor-relations and treasury professionals in the ballroom at the Loews Beach Hotel.
And yes. It was lovely there, above Muscle Beach (I walked from the sandy side of the hotel to the front for a cab back to the airport, five minutes in the lovely January sea air in suit and tie).
When we asked how many had heard of dark pools, only a third said so. That may change soon. One big reason more people know about high-frequency trading is that the media have given it ink. Yesterday, FINRA announced plans to scrutinize dark pools over whether gaming occurs, where traders may post orders on stock exchanges that create arbitrage opportunity in members-only markets where no price information is offered (dark pools).
Which leads us to IR 101 in 2013. I was trading notes recently with a friend and fellow IR veteran about the Nasdaq buying Thomson Financial and The ICE buying the NYSE, and we got to talking about what’s changed and what hasn’t in our profession.
Fifteen years ago it was 1998. eBay went public Sept 24 and closed up 163% at $47.38 (raising $63 million on 3.5 million shares offered). IR pros were doing the Big Four (positioning their companies in the capital markets, shaping internal and external financial communications, building capital-markets relationships, monitoring how equity is traded). Continue reading →
December 19th, 2012 — The Market Structure Map
No, our title does not refer to Surveillance. Despite the Thomson/Nasdaq deal last week.
Yesterday mavens of equity markets converged on Capitol Hill to debate trading woes. Apparently the Senate, unsatisfied with just one geological trope (“Fiscal Cliff”), must examine “Dark Pools.”
If you missed the news, we’ll summarize. On the Hill, leaders from the big exchanges argued that operators of trading facilities that don’t post prices and which may select which parties can participate in buying and selling are harmful to investors who want to know the true price and supply of stocks.
As you may know, “dark pools” are markets where equity traders may find shares without having to post a price, thus avoiding actions that might move market pricing or draw attention to orders. The price for shares in dark pools is determined by whatever price is best at the exchanges.
Exchanges naturally feel a bit like Best Buy in an internet world. You’re using our liquidity and our prices to determine what you can get at another market.
For their part, dark-pool operators including Credit Suisse (runs the world’s largest dark pool, Crossfinder) and ITG (operates POSIT) countered that markets are ill-served by an exchange oligopoly that writes its own rules, regulates itself and earns some $450 million in shared data revenue off the consolidated tape that is in effect a government-granted monopoly.
It’s akin to knowing that no matter what you do, if you match up trades at a certain pace you’ll earn a profit on data because it’s guaranteed – almost like rate-of-return utilities. Dark pools think that’s a whopping tradeoff for setting prices everybody else uses.
Joe Mecane, head of NYSE equities, made the point of the day though. The nature of markets fostered by rules has “created unnecessary complexity and mistrust of markets,” Mecane said. He wants Congress to simplify it. Continue reading →