Flash Orders and Dark Pools

The story about dark pools continues. The competion of exchanges for market share has led to yet another “innovation” in the field of finance. Reuters describes the issue of “flash orders” as follows:

NEW YORK (Reuters) – Recent moves by exchanges to dabble in anonymous stock trading is tripping yet another alarm for U.S. regulators and amplifying a debate over fair markets.There could be serious implications for the way orders circulate through capital markets if the moves, which reflect exchanges’ intense competition for market share, provoke a response from securities regulators.

The U.S. Securities and Exchange Commission has already received at least three letters of complaint, including one from the Securities Industry and Financial Markets Association, warning of a market that benefits a privileged few while distorting the prices of public stocks.

The SEC said it has not yet decided whether to act.At issue are so called “flash” orders — buy and sell orders the Nasdaq Stock Market and BATS Exchange this month began sending to a private group of select market participants before routing them to rival venues. The service closely mirrors one long offered by fast-growing alternative venue Direct Edge.

The flashes, an optional service, also alert some “dark pools” — non-displayed, private venues that anonymously match orders, allowing traders to hide their intentions.

Reuters also noted that

“You get the feeling when trading that you’re not seeing the whole picture,” said Bernie McSherry, senior vice president at institutional broker Cuttone & Co.”You’ve got lots of hidden liquidity, you’ve got orders that are being exposed preferentially to some participants and not others, and I think that just works against an efficient market,” he said. “It’s not a good development.”

I guess that is more than a feeling. That is the new cold hard reality. Those pools are the sanctum  of  the religion of mammon, access to which is closely guared by the caste of high-priests – which decides on its own who will be made part of it and who not – normal folks can only pray to the new god . If believe can move mountains, it can certainly push the Dow (or whatever) higher.

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