Wednesday, May 20, 2009

Zero Hedge aggravates Wall Street again

The SEC is now going to be looking into Wall Street's "dark pools" of liquidity, and the (IOI's) Indications of Interest notifications:

The Securities and Exchange Commission's top trading executive laid out a series of broad concerns about dark pools in the U.S. equity markets. His comments signal a potential shift in the SEC's attitude toward non-displayed liquidity executed in alternative trading systems.

James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, said dark pools could impair price discovery by drawing valuable order flow away from the public quoting markets. "To the extent that desirable order flow is diverted from the public markets, it potentially could adversely affect the execution quality of those market participants who display their orders in the public markets," he said. Brigagliano added that anything that "significantly detracts from the incentives to display liquidity in the public markets could decrease that liquidity and, in turn, harm price discovery and worsen short-term volatility."

Last month ZH had this to say:

"The same "liquidity providers" that have been discussed previously in Zero Hedge, are also in dark pools to make sure trading costs are shifted from observable to less observable or not directly observable. Observable trading costs are the difference from VWAP, open price or arrival price + commission and spread costs. Less observable are bid/ask drift before a dark pool print. For example if I put an order to buy 100k shares of IBM to POSIT, UBS, or GS (especially the latter two where prop traders are more than happy to get right of first refusal on the bid/offer if they so desire) the stock might move up about 10 cents (not an actual observation) and than print my block. Within 15 minutes after the print, the stock is back to being 10 to 15 cents lower. Example of non-observable cost is P&L reversion. In the IBM example, I put an order to buy 100k shares to POSIT. The stock does whatever it would have done anyway and within 30 minutes my block is printed during regular crossing session. In the next trading day, the first 30 minute VWAP will be about 10 to 15 cents lower. So if I buy IBM on POSIT on a regular basis, on average, I can pay 10-15 cents less just by buying the next day on open market. If we factor in higher crossing networks commissions (mostly invisible, charged via net markups), the promise of a free lunch become the reality of very expensive lunch.

Obviously, mutual and pension fund traders have high alpha, they need access to expensive liquidity provided by GS principal bids desk, crossing networks and other means where trading costs are allocated via the "back door" and do not affect buy side traders' bonus scheme payouts. And obviously, teachers, firefighters and the police along with 401(k) investors are on the receiving end. What's new?"

Last week, Merrill Lynch threatened legal action against ZH, to take down some posts that David Rosenberg of Merrill Lynch had written, because Mother Merrill, ostensibly didn't want Rosenberg's bearish views promulgated in an up market amongst those that didn't pay for Merrill's research.

Now they are looking at dark pools. A few months back, I had my own take on these "convictionless" traders and their dark pools.

It's nice to see Wall Street getting some more exposure that they don't want!

No comments: