As time continues to move on more and more organizations are beginning to see how dangerously fragmented and misunderstood our financial markets have become. As “lit” exchanges come under scrutiny of regulators to provide the appearance of diligent oversight for the Muppets of the world, dark pools have become more popular. Now many trading outlets are capturing mind-boggling profits from manipulative tactics and are seeking ways to deploy that capital in a secretive manner so as not to move a market, many of these firms are accessing dark pools.
Why chase the Mom and Pop trader with a 100 lot order when you can sneak into a dark pool, hide your order and jump in front of a mutual fund who is seeking to execute thousands of 100 lot orders? The Australian Stock Exchange states that Dark Pools account for 30% of Australian trading and those HFT firms operating in them are doing so under limited regulation. We keep ignoring these black swans, and as one part of the population grows their wealth through manipulation, the other group losses their wealth through manipulation.
We have rationalized, with the silliest of reasons, how prices have moved during periods of extreme HFT manipulation and battle activity:
ASX has stated:
There is clear evidence, both in Australia and overseas, that an increase in dark execution results … in higher costs for investors and a negative impact on price discovery” and “moreover, the proliferation of trading venues and algorithmic trading significantly increases the risk of unexpected market movements or disruption.
Now we have an exchange that is warning of the dangers of under regulated, misunderstood, super-fast colocated trading, well after Themis Trading started, followed by ZeroHedge, Nanex, and Calibrated Confidence. The tick-by-tick analysis of each of these events screams of the short falls we have in regulation, market plumbing, and participant intelligence. As colleges pump out another new round of financial interns that only learned what their respective schools taught them (since individual intellectual curiosity is “out of style”), more people armed uninformed viewpoints will enter the fray and continue to make problems for outlets like ours to find solutions, such as those proclaiming the accuracy of the Efficient Market Hypothesis. It’s more like a Broken Market Conclusion
The Australian Securities and Investments Commision does offer a solution whereby they plan to:
limit the migration of trades to dark pools by allowing trades of $1 million or more for the 26 biggest and most actively traded shares, trades of $500,000 or more for a group of 28 shares and $200,000 for others.
ASX says the $1 million threshold is too low and it has called for a review on the limit, urging a $25K mimimum limit to imposed on dark pool trades. The question remains though, how long will it take before the superfast traders find a new way to toss around all the liquidity they are capturing for themselves by manipulating physics and the structural make up for capital formation market centers?
Tags: Algorithmic Trading, Amazon, Apple, Australia, Australian Stock Exchange, Dark Pools, Efficient Market Hypothesis, Facebook, High Frequency Trading, Initial Public Offering, Knight Capital, Nanex, Themis Trading