Tagged: Capital Formation

The Dark Arts

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. (more…)

Did you see the Nicole Kidman film ten years ago called The Others?

A woman becomes convinced her house is haunted. In case you’ve not seen it, I’ll save the twist, but it’s the twist that matters. Things are not as they seem.

Crack WSJ markets writer Tom Lauricella asked in a page one article Oct 18 if markets are cracked. Traders he surveyed said building positions in stocks is getting harder. Liquidity is thin. Spreads are rising. Getting trades done – completing an order to buy or sell shares within projected price ranges – is challenging now in the most liquid names.

In the movie The Others, the problem is perspective. The answer to what’s going on depends on how you look at it. Since we’re limited by the camera and the perspective of the central characters, the reality of the problem doesn’t manifest itself till near the end.

In markets, it seems like liquidity is the problem. But what if it’s a matter of perspective? Classically, liquidity is capital. Today it’s somebody on the other side of the trade. Are they the same? No. What’s on the other side of most trades? A machine. Why is it there? Incentives. It’s not there because it’s committing capital. It’s there because it’s paid to be there. (more…)

Why Franklin Templeton Likes HFT

Last week in Miami, I took part in a panel discussion about modern trading realities. The weather Thursday was like it is in Denver now, about 60 degrees. Those of you south or north who need to warm up, come visit. I clocked some hours on the bike Saturday and Sunday. It wasn’t sunburn weather, but on bikes in December at 5,000 feet? Life’s good.

Getting back to trading, how come some investors rail at churn trading, while others love machine intermediation? Somebody must be wrong, right? (more…)

Size (of trades) Matters

Mother Nature and Denver last week were like a samba episode of Dancing with the Stars, twirling furiously. In fact, snow torpedoed my trip to Boston, but only after an hour floundering through a foot of slush to the airport at an average speed of 25 mph. And today it’s 70 degrees on the Front Range.

Switching gears, I owe a mea culpa. We’ve berated the exchanges for fueling conditions that constrain real investment – fragmentation, rebates, direct access, sponsored access, high-frequency trading, flash orders etc, et al, since data and transactions are keys to exchange prosperity. But Duncan Niederauer’s interview in the weekend Wall Street Journal (see link below) was the best call yet for return to capital formation in the equity markets. I am now cooking up a comfort-food casserole of crow in the crock pot.  I did drop a note to Mr. Niederauer saying so, too.

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