Here is an outcome Ahhah warned everyone about a long time ago.....took this from the SI Naked Short Selling thread.Comments in preferance are rrufff's.
To: ravenseye who wrote (2382) 3/23/2007 8:06:51 PM
From: rrufff of 2391
That was an interesting website and article. Going to put it here as it touches upon the issues of off market transactions, through which many believe is the source of manipulation in hiding the ills covered by this board. It is thought that money pools put together transactions overseas, off books, internal, etc., to 1)keep as much distance from the SEC and US regulators as possible 2)create more paper shuffle to hide manipulative underlying transactions, often risk free. Notice the players.
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The SEC May Start Monitoring Non-Transparent and Restricted-Access Trading Alternatives, or Dark Books, More Closely in the Future
Mar 22, 2007
URL: advancedtrading.com
Dark books, dark pools, undisplayed liquidity — whatever name it's given, not since chlorofluorocarbons were identified as a main source of ozone depletion has something invisible gotten so much media attention. Now it seems that regulators are preparing to increase scrutiny on electronic trading that takes place outside the traditional exchange structure. With a new entrant every few months, the number of nondisplayed trading venues, variously estimated at 30 to 40, keeps growing.
In a January 2007 report, the TABB Group estimates that the number of shares per day traded in crossing networks and broker-operated internal markets will increase 43 percent per year, from 512 million in 2007 to 1.48 billion in 2010. TABB Group analyst Jeromee Johnson estimates that the overall U.S. equities market is currently 9.4 percent "dark," and that may increase to 15 percent by 2010.
The numbers have gotten the SEC's attention. On Sept. 12, 2006, Erik Sirri took the helm of the SEC's Division of Market Regulation. Within days he told the Investment Company Institute that the SEC needs to "better understand" these pools and that the presence of these dark venues "brings up serious policy considerations and transparency issues," according to media reports.
For this article, Sirri issued the following statement: "One of the Commission's goals is to promote vigorous competition among markets. In addition to the exchange markets, however, other types of trading platforms have sought to compete for a share of U.S. equity trading. These include crossing systems that facilitate block trading by institutional investors as well as liquidity pools operated by broker-dealers that seek to cross orders internally without any interaction with the transparent, public markets. ... The number of broker-dealers operating these 'dark' pools of liquidity has grown rapidly.
"They can benefit their participants by minimizing the impact of trades on quoted prices and avoiding the trading fees charged by public markets. On the other hand, they increase the fragmentation of trading volume in U.S. equities and may detract from efficient public price discovery. The extent to which these nontransparent and restricted-access trading alternatives are able to divert significant trading volume away from the public exchanges will be an important market structure issue for the Commission and Division staff to monitor."
There already are regulations on the books to govern dark pools. "When Reg NMS came in, it modified some provisions in Reg ATS, specifically market-access rules," says TABB Group's Johnson. "It lowered a key threshold from 20 percent market share to 5 percent market share in a given name over a 60-day period — if you exceed that threshold, you need to display a quote through an SRO [self regulatory organization] or be an SRO to the public market. If anonymity is your model, that shoots your model in the head."
After receiving a petition from Liquidnet, the SEC made an exception to this rule for the dark-book operator because Liquidnet's closed-network model is essential to its value proposition. The exemption relates specifically to the portion of the regulation that stipulates that fair and open access to dark books is to be provided, even if they are under the 5 percent threshold. Liquidnet's stock-in-trade is that it prohibits broker participation in its main market, and its popularity with the buy side is largely due to its peer-to-peer model.
But the decision may not be sitting well with the SEC after all, according to Johnson. "What I hear from the SEC is that they regret making the exception," he contends. "And now that dark books are popping up left and right, it is more likely that Liquidnet would lose its exemption than another venue would be granted an exemption."
Even if regulators took a stricter view of Liquidnet's activities, it exceeds the 5 percent threshold on only a very few occasions, Johnson notes. And it could always go "pitch dark" — offer securities for trade but remove the prices from all screen displays in a scorched-earth interpretation of "fair access" for a few days until volume went down, he explains.
The Island ECN acted similarly in 2002 when it faced the obligation to display its exchange-traded funds (ETFs) in the Intermarket Trading System, where floor-based traders could "trade through" its prices. Rather than do this, Island went completely dark. Its market share declined by more than half in some securities, but it remained a highly successful ECN until it was acquired by Instinet and, later, Nasdaq. SEC officials declined further comment on the issue. Liquidnet executives could not be reached for comment.
Some dark operators say they would welcome a lowering of the threshold or more-strict oversight, believing that it would increase institutional traders' confidence in anonymous markets and increase trust that brokers are not making proprietary trades against their customers. "Regulators are clearly taking an interest in understanding how dark books work," says Jose Marques, a director at Credit Suisse, which is a sponsor of the crossing network LeveL, along with Citigroup, Fidelity Brokerage Co., Lehman Brothers and Merrill Lynch. "That is an entirely healthy and appropriate thing for them to be doing," Marques adds. "We view the possibility of the SEC looking into dark books and lowering the fair-access threshold as being positive."
Closing the Books? Market observers say the future will support fewer dark books — but not because of regulatory intervention. Rather, market forces likely will prompt consolidation, just as it did with the earlier generation of ECNs.
"It is silly to have 40 different pools that have the same structure and value proposition," says TABB Group's Johnson. The arrival of BIDS (Block Interest Discovery Service) and LeveL in the past six months, both of which link multiple dark and crossing services, "offers a viable alternative to venues acquiring each other or the removal of players in the market," he points out, noting that on March 1 six more firms invested in BIDS: Bank of America, Bear Stearns, Credit Suisse, Deutsche Bank, JPMorgan and Knight Capital Group, joining original founders Citi, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS.
From the client standpoint, says Tim Olsen, SVP and head trader at ICM Asset Management, dark pools are just one more tool, and they still don't comprise enough of the total marketplace to wring hands over deciding between them. "I probably access four or five dark books, and I don't feel I am missing anything by not accessing the other 30," he says.
Although it can be difficult for a client to tell with what kind of order flow his orders are interacting, from the customer standpoint, choice is still better than no choice, according to Olsen. But, he says, legislating choice would be a futile effort. "The regulators have to let the markets equalize themselves," Olsen says. "It still comes down to survival of the fittest — I think the pendulum will swing and market forces will do the work for the regulators." |
