Common SenseBrokers/dealers and all other market makers would not be engaged in this practice if it was not profitable. It's obvious also maximizing profits for clients is not a concern. Furthermore, if a market maker can see all the orders its firm gets and execute trades within this group before giving the broader market access, this is an advantage to the firm only. Dark pools prevent orders from being seen on Level II quotes which defeats the purpose of Level II – to see the range of Ask/Bid orders. Obviously, if two or more firms do this among themselves, they are creating a pre-emptive market that only they have access to. This allows them to skim and glean profits like cherry pickers which is as easy as taking candy from babies (retail investors). The retail investor experience essentially always feels like being fresh meat. We are a means to fee income for everyone else. How can there be market transparency in a dark pool which creates blind spots? Everyday citizens trying to make wise investment decisions cannot do so when there is not complete price discovery and volume discovery. Dark pools fragment information worse than it already is. Dark pools offer the best of both worlds for those who are privy to the information and privy to deciding what to do with orders. Dark pools only serve the interest of the brokers, dealers, market makers, institutions and accredited investors. These people already have high frequency trading, better information, an army of researchers, an inside track and inside information. Plus, the market makers know what the intentions are of their clients but the clients do not have the same information regarding other clients. If you add this to High Frequency Trading, retail investors are pushing snowballs uphill while market makers and institutional investors are using heavy equipment and underground tunnels to always come out on top. Plus, market makers are permitted to post one-sided quotes and unpriced indications of interest. This putting out of “feelers” is sneaky, underhanded side-dealing that further harms retail investors.
What Must Be DoneMake dark pools and high frequency trading illegal. Also defragment the market or provide for a central clearing location for orders that can be seen by all, big, small, Wall Street and Main Street. At a minimum, make direct order routing the default for all order types because this is the expectation of the public. If not, then make direct order routing possible for any and all types of trades. If something is not done today, right away, once retail investors jump back into the market with both feet in 2013, it will be a feeding frenzy in dark pools and a lot of carnage, worse than the 2000 Dot.com wailing and gnashing and worse than the equity drain from retail investors stemming from the 2008 market free fall. The added tragedy is that retail investors don't have a clue. We believe online trading means equal access. Distribution List:
Senator Jack Reed, Senate Banking Committee
Securities and Exchange Commission (SEC) Division of Trading and Markets at email@example.com
Financial Industry Regulatory Authority (FINRA) Office of the Ombudsman References:
Do Dark Pools Harm Price Discovery?
Lighting Up Dark Pools and Dissing Dodd-Frank
Senate Panel Eyes Dark Pools
Vow Of New Light For “Dark” Trades