A New Danger: Dark Pool Trading Systems

Elaine Meinel Supkis

Just like in the late 1920's, many novel and odd schemes and systems as well as dealers spring up as stocks shoot up in value. This time around, we have 'dark traders' and other entities which are set up to make trading as unfair and murky as possible. But always, the tricks work only if the system is being manipulated by the people running it. When something or someone (like a bunch of Asian commies) come in and do whatever they want, then these systems set up to jigger the markets collapse along with everything and everyone else.

From Market Watch:

Liquidnet is one of dozens of new private trading networks that -- in just two years' time -- have ushered in a sea change that challenges Wall Street's top institutions while posing vexing questions for regulators and investors alike.
Driven by the boom in electronic trading and other technological advances, a range of upstart entrepreneurs now are doing the kind of bulk trading that up until a few years ago was practiced exclusively in upstairs trading rooms at big brokerages like Morgan Stanley and Lehman Brothers.
"We're in the middle of a revolution," said Tim Mahoney, chief executive of BIDS, a trading system launched by a consortium of top-tier Wall Street firms.

These so-called alternative trading systems are propagating rapidly, are often labeled "dark pools" because of their nebulous and murky nature. Estimated to handle about 1 out 10 shares traded each day in the U.S., dark pools are meeting a need by institutions to grab or dump stocks quietly -- and anonymously. Like Liquidnet, many of them sport imaginative brand names in a nod to science fiction, such as Sigma X, VortEx and Block Alert.

Dark pools with a vortex at the heart, ah. Just the sort of territory I tend to go...I know some people who are computer experts who do murky things on Wall Street. No matter how I question them, they won't tell me exactly what they do there but it doesn't matter, heh. There are ways of finding out the truth and one of the marvelous things about the internet is, this is their home and they may hope others can't see where they operate but the Net is the Dark Pool and all one has to be is a silver, swift fish and one can trace even the paths of the vortex as it pulls in the water.

When I was a child, I wanted to know why civilizations died. I remember vividly, looking at pictures of ancient Crete. The happy, buxom ladies proudly displaying their breasts, the flowers, animals and mythological creatures interlaced with portraits of the sea, why did this disappear? One of the ways to trace what happens is to watch the Earth and money. When the concept of 'wealth' was created, it was connected with the wastes of the digestive system and death. There seems this powerful psychological connection that probably lies in our deepest past, our cannibalism.

That is why, when I found this article today detailing the latest schemes to hide, to bury, to conceal, to mislead, when dealing with the stock markets, I laughed. Yes, this is very purple and black and underground, Pluto's realm. Making money by moving or hiding money. Yes. Let's look at this latest and probably even more dangerous than the stupid hedge funds, trading organizations designed to trick outsiders and conceal hostile moves, the hidden knife, the assassins in the dark:

Here is Liquidnet's web page:

Why does a million-share order get whittled down to a 25,000 share execution?

Today's current market structure is a highly inefficient marketplace in which institutional supply and demand goes unrepresented. Concern over information dissemination, as well as lack of depth on the exchanges, means institutions reveal little about the size of their orders. When these orders are executed on the exchanges, institutional demand is paired against retail supply, which results in increasing market movement. Institutional size isn't readily found.

The Solution

How does Liquidnet solve this inefficiency?

We created a global institutional trading marketplace in which buy-side firms trade size directly with size without any other market participants knowing - bypassing the exchanges completely.

OK: who are these 'institutions' hiding from? Who is the entity they wish to elude, fool or trick? The premise of the stock exchange is, 'insider' trading is illegal. But more than that, people who know something is going to happen must get onto or off of that particular train and if the Federal government sees them jumping on or off, they might get charged with a crime! So having a system set up that quietly and secretively buys or sells in such a way, no one can be caught as a criminal, well. Um, where is the SEC?

Going after Martha Stewart?

Note that this guy is offering his services so people who are committing crimes can be anonymous. Namely, honest people don't have to hide. They are, like me, out in the open. Trust means operating where everyone can see what is going on. When people lurk in dark corners and do things while cloaking them, we should expect criminal things to happen. It is inevitable.

Now, I know that Homeland Security (sic) is, like the Security and Exchange Commission, supposed to track dark activities and force them into the light of day so what the hell is going on here? Why are 'big traders' being allowed to operate in such a way that they can manipulate the markets like this? And of course, hedge funds are this sort of thing, too. Why are they allowed to operate as a cloaking device?

Well, unravelling all this is tricky as hell. But the vortex is obvious: it is red ink fed through the USA and flows mostly from Asia to the USA and back again while various dark pools are used to suck up the wealth flowing out of the USA. For this is what it is all about: we are going ever deeper into debt. Even if we, individually, cease going into debt, our country is. There is a lot of red ink there and this year alone, there was $750 billion trade red ink and on top of this, $200+ billion of government red ink which means a trillion dollars of red ink flowed this last year and translating this into wealth for the rich is where these various hedge funds and dark pools are all about.

Note also that top 'daylight' organizations like the famous Goldman Sachs group are running these things, and our Treasury secretary is who? Ah, the President of...Goldman Sachs. So much for oversight. People wondered why he 'took a pay cut' to go take over the entire country's economic system! What a sacrifice.

My head hurts at such naivety.

From Reuters:

Liquidnet, a rapidly growing electronic stock-trading marketplace, is considering an initial public offering as early as next year, its chief executive, Seth Merrin, said on Monday.

"We are exploring the idea of potentially listing in 2008. No guarantees. For sure not in 2007, but a potential for 2008," Merrin told the Reuters Exchanges and Trading Summit in New York.

With the Boss in charge of the government agencies that oversees this garbage, it is no wonder they are all tempted, the hedge funds as well as the darkness guys, to 'go public' so they can tap into the stream of money that still lies in various pools around this nation. Then they can all pretend to get rich while doing absolutely nothing except moving up or down, various cyphers and numbers and cyphers and numbers are all magical, the basis of magic going back in time to the very invention of numbers and cyphers (writing) goes way back.

They imagine they can keep this all very mysterious so regular folk won't question what is going on. Is this 'money' being 'printed' or is it being created via using computers doing murky things that are not exactly legal? And do the numbers generated come from actual units of 'money' or is this why the graphs on every level are shooting up rapidly? After all, isn't money just numbers? And the government simply sets up numbers and tries to ignore reality but this causes 'inflation'. Or they could, like Japan, hide the inflation by feeding it directly into these 'dark pools'?

The people creating this wealth which is not moving down the scale to the bottom 50% of the people, can use the cyphers they attach to their own bank accounts to buy whatever they wish. And everyone is going crazy because computers make this so idiotically easy, no one has to worry their poor little brains tracking what is going on! Oh, joy.

From the Wall Street Journal:

Goldman Sachs Execution and Clearing, L.P. (GSEC) announced today that its SIGMA X crossing system achieved record volume, primarily driven by new functionality enabling clients to leave resting orders within SIGMA X. This record volume represents a 14% increase over February and provides more opportunity for Goldman Sachs' electronic trading clients to achieve price improvement, while minimizing the impact their trades have on the market.

Goldman Sachs clients can now anonymously leave or "rest" orders within SIGMA X, the firm's electronic trading crossing network. The new functionality allows clients to interact with GSEC streaming liquidity, external liquidity providers and block-level client orders. Clients can place resting orders through REDIPlus, the firms' execution management system (EMS), through their own Order Management System, or from another firm's EMS.

This is probably one of the first signs of such an organization. It has much lower profile than the hedge funds. This is probably due to the fact that unlike the hedge funds, they haven't been arrested for crimes yet. But look at this page deep within the Instinet site:

Hiding trading. Right. Argh. Anyone in the SEC should be out there with the handcuffs, seeing this. Because of course, if the 'big' trader is hiding his moves, this means he is most likely SELLING OFF to deluded people who think this is a good deal while he smirks, knowing it is a terrible deal. And if he is buying, he doesn't want to let the people selling know he wants their property really badly. This reminds me of some of the sneakier people I have known in my life.

From Instinet's wep page:

Instinet to Expand Block Trading Platform with Launch of Intra-Day Cross

NEW YORK--(BUSINESS WIRE)--June 8, 2004--Instinet, LLC todayannounced the expansion of its suite of electronic U.S. equity blocktrading services with the addition of the Intra-Day Cross (IDX).Scheduled to launch Wednesday, June 9, IDX was designed to counter the industry trend toward smaller execution size, and give institutionalinvestors the opportunity to anonymously and cost efficiently trade large blocks of U.S. stock, or illiquid U.S. securities, without human interventionand without an effect on price. IDX will join thecompany's other institutional block trading services: Volume-WeightedAverage Price (VWAP) Cross, Continuous Block Crossing (CBX(SM)),End-of-Day Cross (EDX), ProActive SmartRouter(SM) and sales tradingdesks in North America, Europe and Asia.

Here is some information about 'Night Hawk':

Nighthawk was designed to allow the trader to take advantage of all available liquidity in the U.S. marketplace, including dark pools and hidden order flow.

Nighthawk aggregates liquidity from multiple markets, including NYFIX Millennium, Liquidnet H2O, Credit Suisse's CrossFinderTM, Fidelity's CrossStreamSM, the ISE's MidPoint MatchTM and other ECN/ATS pools. It pings ECNs for discretionary liquidity and accesses Instinet's upstairs pools, including Instinet CBX® and Instinet Crossing®.

Nighthawk incorporates pricing behavior that helps to avoid paying the spread. Optional user settings control order visibility, pegging strategies and market allocation.

As befits his pulp influences, Dr. Mabuse is a master of disguise like Fantômas and a master of telepathic hypnosis, not unlike the hypnotist Dr. Caligari. Like Fu Manchu, Mabuse commits very few of his crimes in person, instead operating primarily through a network of agents acting out schemes he has laid down for them. Mabuse's agents range from career criminals following him for money, to innocents blackmailed or hypnotized into cooperation, to dupes so successfully manipulated that they do not realize that they are doing exactly what Mabuse planned for them to do.

Mabuse's identity often changes; one "Dr. Mabuse" may be defeated and sent to an asylum, jail, or grave, only for a new "Dr. Mabuse" to later appear. The replacement invariably has the same methods, the same powers of hypnosis, and the same criminal genius. There are even suggestions in some installments of the series that the "real" Mabuse is some sort of spirit that possesses host after host.

Another trait that separates Mabuse from similar characters is the self-destructive bent to his personality and his plans. (Some have even suggested that Jacques took the name Mabuse not, as he claimed, from the painter Jan Mabuse who used it as his pseudonym, but from a pun: M'abuse is French for I abuse myself.) Several times, Mabuse's plans are foiled only because he himself interferes with them, as if he is trying to bring about his own downfall. This dovetails with another important distinction about Mabuse: whereas Fu Manchu aims to conquer the world, then rule it, Mabuse makes clear more than once that his intent is to destroy the world — and then rule the ashes. This may explain why the character is regarded in Germany almost more as a horror icon, akin to Dracula or Frankenstein, than as a criminal mastermind of adventure tales akin to Fu Manchu.

It has been at least 30 years since I saw that movie but what interested me most was how Dr. Mabuse in the first Fritz Lang movie deliberately set up and caused a stock market bubble and then a panic. This was before the collapse of the German monetary system and the Great Depression. Lang made the ever-famous 'Metropolis' right on the eve of the Great Depression and it is a very interesting movie indeed. In it, the workers keeping things going are turned into machines and their lives increasingly regimented and cut off from the stream of money pouring out of the system and into the laps of the rich who deliberately keep themselves ignorant of the true source of all this wonderful wealth.

Just like we see with everything today. In China, it is a very brave person who tries to penetrate the many veils hiding the labor from the rest of us. When Apple or General Motors or any Japanese industrialist, if any of these people like Walmart are faced with the realities of what is going on in the lower depths of the Machine, they all profess to be shocked and dismayed.

Well, you can bet, that is all totally fake. And just like all these people are hiding stuff or back dating paper work like Steve Jobs of Apple did, etc, they don't care. They are out to make money and if this means changing dates on documents or using 'dark pools' to conceal trades that are basically insider trading, etc.

This is how they get filthy rich. There is a lot of blood on a lot of hands. But it is invisible for they dip their hands all the way up to the shoulders in the Dark Pools and this is just another name for the waters of the River Styx.

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Comments

[JSmith]

I'm not sure how the image on the tarot card goes with "cruelty". Are the guys in the robes closing in on the girl going to make her convert to Christianity against her will?

Oh, the horror!

[DeVaul]

I'm not sure how the image on the tarot card goes with "cruelty". Are the inquisitors in the black robes closing in on the girl going to make her convert to the "one true faith" against her will?

Oh, the horror!

I'm not sure how the image on the tarot card goes with "cruelty". Are the mullahs in the white robes and headbands closing in on the girl going to make her convert to Islam against her will?

Oh, the horror!

I'm not sure how the image on the tarot card goes with "cruelty". Are the priests in the robes closing in on the girl going to make her convert to Hinduism against her will?

Oh, the horror!

I'm not sure how the image on the tarot card goes with "cruelty". Are the guys in the black robes and dreadlocks closing in on the girl going to make her convert to Judaism against her will?

Oh, the horror!

I'm not sure how the image on the tarot card goes with "cruelty"...

[JSmith]

DeVaul, have you been drinking again?

[DeVaul]

Yep! And you drove me to it. I hope you're happy.

[Ernest Fred]

You are mistaking in your understanding regarding institutional stock trading.

The issue of "hiding" trades is that there are many who try to take advantage of institutional size trades made by mutual funds, banks, hedge funds etc. When people are aware a fund manager wants to buy or sell a large block of stock they will "run ahead" of the order. That means they will buy a few thousand shares or more, knowing that the large money manager buying hundreds of thousands of shares will have to take the stock price up and allowing the trader running ahead to profit as the stock price rises. Traders who run ahead make the situation worse for investors by taking stock prices up or down as they run ahead. (replace buy with sell and stock price up with stock price down and it works the same way for sellers as for buyers)

All of the systems you refer to were designed by good old capitalists, not commies, looking to "build a better mousetrap" for investors. I believe that is the American way?

Dark Pool is simply a reference to the fact that when you trade in one you don't see any orders but your own, which trade off of the same prices all investors see from the exchanges, and from the trades executed in dark pools and or any other trading system.

[John]

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[Llazy1]

Mabuse? Perhaps a referance to Nostadamus's "Mabus", the third antichrist?

[Honest Fred]

Dear Ernest
Greed is Good.
Dark is Good.
Yeah, right. Seen that movie.
It ends with a bang....and then it really gets scary.
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[Mike]

As a former prop firm trader I worked a lot with dark books. The second point brought up in the original post is interesting, as I think there are two sides to it.

When using dark books within a small cap stock as an active trader (one who had access to the dark books) liquidity is actually increased. A dark book, or the trader behind it does not want the market to know they are there, otherwise they would have taken all the supply the stock already. Thus, the dark book sits waiting for additional liquidity sources to find it. Nerveless that liquidity is there, whether seen or not.

Small investors may not know this is occurring. But the very fact there is a dark book actually increases volume once transactions start firing on that dark order.

When I traded I always tried to exit on dark pools first. This means if I had 5000 shares I would get as much out on dark liquidity as I could. This means those shares are not taken off the visible book, which means someone else can now buy or sell them.

From personal experience, I rarely used dark books to place orders, but I did use them to exit positions. This basically meant that some my orders showed on the NYSE or Nasdaq Level II, while some were not shown on the book but were reflected in the ticker as transactions through against the dark book.

I don't think the small investor is hurt by this. Anytime we have someone who wants to pick up or dispose of stock, whether hidden or visible, inevitably that has to create movement or volume. That movement or volume can benefit the small investor because they can capture these movements with small share amounts. They are not playing the same game as the dark pools.

If a hedge fund needs to pick up 30,000 shares of a stock that does 10,000 volume on average a day, they are not going to do it 100 shares at a time over 3 months. They are going to leave a dark order out and hope someone comes along with bigger lots than the measly shares which are showing on the book. Thus big traders exit on each others dark orders, and small investors still have the shares on the book to enter and exit positions. If a trader is big enough to have to worry liquidating large positions that could cause massive slippage, then they should have access to dark books.

But in this new age of lots of hidden liquidity, traders, especially short term traders need to be aware of what side the big money is on, and when.

Just as a large order can cause surges or dumps in price, so can a discovered algorithm which then is exploited by traders. Traders need to aware of this.

If you are interested in speaking more with me regarding dark liquidity pool trading you can view my writings on http://www.darkpooltraders.com

[Order taking service]

Dark Pool is simply a reference to the fact that when you trade in one you don't see any orders but your own, which trade off of the same prices all investors see from the exchanges, and from the trades executed in dark pools and or any other trading system.

Ben Cliff

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