On Goldman, Dark Pools, And You


Ok, ok, I thought I had said my peace (or is it “piece”) on HFT and such years ago, repeating it several times.  But it appears that this is the story that the conspiracy nuts will not stop nattering about, and my emailbox keeps banging at me.

So I’ll step up and take another swing at the ball…. let’s see how I do this time around smiley

Goldman might close its dark pool.

Or it might not. If you doubt Goldman’s public-relations genius, consider that it is a hero of “Flash Boys” for sending its orders to IEX for 51 minutes, and then stopping.

Uh, yep.

That makes them a hero.  Right.  Remember the “Muppets”?  No?

You’re the Muppets, if you happen to have forgotten the lesson taught back in ’07 and ’08.

There really isn’t a lot to talk about here up until people stop believing in fairy tales and unicorns.  The premise that someone in a negative-sum game can make money without another person concurrently losing the same amount of money is a fantasy.

Nobody wants to identify the losers and it’s not because they can’t.  The losers are all of those people who own stocks in other-than-HFT venues — that is, pretty much everyone.  Yes, the losses happen a tiny fraction of a penny at a time, but then again so did they in the old classic interest-calculation skimming game that used to be played back in the days of passbook accounts.  That didn’t make the loss any less real then and it doesn’t now.

One has to understand that Reg-NMS made specifically unlawful providing preferential time access to data.  The entire purpose of Reg NMS was to provide one quote stream that was the most timely so as to level the playing field and publish a known and good “national best bid and offer.”  The very premise of trading on material non-public information is that you obtain the information before anyone else and price is most-certainly not excluded from the definition of “information.”  That the Department of Justice is “now” looking at this matter smacks of political expedience rather than what should have happened in my view, which is the immediate issue of indictments against both the HFT firms and exchanges the day they started selling and buying “better” data feeds than that which came out of the SIP.

So what to make of Goldman’s move?  Well, not necessarily much, seeing as they haven’t actually done it yet.  But is it really a surprise that Goldman would shut down something that has a decent shot at being ruled unlawful in the first instance?  I think not, nor should anyone else be particularly surprised if that comes about.

My reaction to all this?

Wake me up when the DOJ indicts everyone involved in this crap and puts a stop to it, demanding that the SIP have actual andundamaged time-stamps on quotes.  In addition, let me know when a rule is adopted that one cannot cancel a quote until the entire market has been able to react to it (that is, something similar to my “2 second” proposal) irrespective of where people in the market may physically be, and in addition that all open orders must be able to be cleared with either cash or committed margin.

Individual investors have had to live with those rules forever, and still do today.  You cannot place an order at a brokerage through their electronic systems that you cannot clear; their computers will not allow it.  In addition, you cannot place an order and cancel it before the confirmation of your order comes back to you, which by definition means others in the market have had enough time to react to it and can hit it.

I suspect, however, that I will be eaten by worms long before anyone in the regulatory apparatus actually bothers enforcing what are supposed to be black-letter laws that bar concocting conduits for preferential information flow and then using it to trade — despite the fact that it is allegedly unlawful to do exactly that.

The truth is that as long as the schemes make the stock market go up — and for the last few years they have — nobody has or will care in the regulatory world.

Even if the money they’re stealing in the process is yours.

The Market Ticker

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