Dark pools’ lifeguard
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âInsider Trading 2.0,â New York attorney general Eric Schneidermanâs war on high-frequency trading abuses, wages on. At the end of June, Schneiderman filed aÂ complaintÂ against Barclays over the activity of the firmâs dark pool, Barclays LX, which is the second-most active alternative trading system in the United States. Schneiderman is accusing Barclays of fraud, suggesting that instead of protecting investors in the dark pool from high-frequency traders (as advertised), the firm did the opposite, and actually âoperated its dark pool to favor high frequency traders.â
A dark pool is a non-public place to trade, which is advantageous for big institutional clients because they can buy and sell in large blocks without the transparency of public exchanges. Big investors see this as a good thing, because they can trade without the interference ofÂ high-speed trading firms that have the ability to affect the price of the trade between the time a trade order is announced and when it is executed. (Hereâs aÂ longer explanation). According to Schneiderman, Barclays sold this narrative to institutional investors to get them to trade on Barclays LX. It then also invited HFT firms into the dark pool, and, to add insult to injury, charged the HFT firms lower fees than their other clients.
âBarclays was lying to customers. They werenât protecting them â they were setting them up,â Columbia securities law professor John Coffee tells theÂ New York Times. The larger worry, writesÂ Matthew Phillips, is that if this sort of behavior is normal in other dark pools, this makes them âpretty much the exact opposite of what they claim to be.â In a story that includes the words âmarket structure nightmareâ in the headline,Â BloombergâsÂ Sam Mamudi and Doni Bloomfield write that âthe action provided ammunition to those who say the stock marketâs opaque structure mainly serves insiders.â After the complaint was filed, add Mamudi and Bloomfield, a number of institutional investors left the platform.
On the other hand,Â Matt LevineÂ says that without HFT, there simply wouldnât be a lot of trading in dark pools. âYou can run a pristine dark pool without âpredatoryâ high frequency traders, and without much trading, or you can run a useful dark pool with high-frequency traders,â he writes. Regardless of the reason,Â Dominic ElliottÂ says it is important to remember that âthe growth of commoditised, electronic platforms has made [equity trading] less profitable,â and âdark pools may be one of the few lucrative areas left,â which is likely why Barclays moved so aggressively to grow its own.
Finally, this is perhaps neither here nor there (but still a wonderful twist): back in February, Barclays LX was awarded the title of âBest Dark Poolâ at theÂ Markets Choice Awards. Barclaysâ head of equities electronic trading, Bill White, said at the time: âFor us, the biggest theme of the year was transparency. It was an important topic throughout the year, and it remains a core element of our strategy.â âÂ Shane Ferro
On to todayâs links:
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