Goldman Sachs Now Dominating Dark Pools Trading

The last time I discussed dark pools, it was in the context of SEC regulation due to the increasing sense of opacity of what happens in this subset of the stock market. A new Reuters article adds fuel to the fire, indicating that not only are dark pools aggressively taking away from exchange trading action, but it is in fact bank-run dark pools that are the primary culprit.

"Dark pools," where orders are anonymously matched so that traders do not alert the wider market to their intentions, have triggered concerns that stock pricing may not be transparent.

But the growth of those run by broker-dealers such as Goldman Sachs and Credit Suisse are squeezing other "dark" electronic trading venues, as well as exchanges, resulting in lower fees.

"The dark pools are definitely going to grow; the wild card is any new regulation," said Dmitri Galinov, director and head of liquidity strategy at Credit Suisse's advanced execution services, running the bank's CrossFinder dark pool.

Overall, dark market share rose last year, but in the last eight months hit a ceiling near 9 percent of the U.S. market.

And while dark pools controlled by independent private ventures such as ITG would be a perfectly normal response to market demand for liquidity facilitation, it is surprising to discover that a vast majority of the pools are in fact controlled by the very same recipients of TARP funding (who are now doing all they can to issue stock so they can repay their TARP bonus burden).

Dark pools owned by brokers and large market makers accounted for 70 percent of all dark U.S. equity volume in April, up from 64 percent in December and from 58 percent a year earlier, according to Rosenblatt Securities, a widely referenced agency broker that tracks 18 dark pools.

Dark pools, which usually publish trades to the consolidated tape with little detail well after they are executed, have been around for decades, but their brands have gained more exposure in the last few years.

As frequent Zero Hedge readers know, when it comes to program trading on a traditional exchange such the NYSE, Goldman Sachs (GS) is by far the most dominant force. It is by Goldman's own admission that the primary reason for this monopoly is to facilitate high-frequency trading in the open market. It would only be fitting that Goldman would be the dominant market player in the dark pool high-frequency market as well. And, as it turns out, it is.

Goldman's Sigma X was the largest in April, followed by market maker GETCO's Execution Services, and Credit Suisse's CrossFinder -- the winners benefiting from the collapse of other investment banks such as Lehman Brothers.

Justin Schack, vice president of market structure analysis at Rosenblatt, said broker-run dark pools had grown because they're faster, cheaper and open to algorithms -- the computerized trading programs that dominate the market, especially during volatile periods such as last year's crash.

"Market structure has changed over the last five or six years in ways that favor small size, rapid-fire trading," Schack said. [SPY IOI anyone?]

The most successful bank-run dark pools have steady participation from individuals, or retailers, whose standing trade orders are gobbled up by high-frequency players who use algorithms and account for about 65 percent of the market.

Why is Goldman Sachs so obsessed with high frequency trading, be it in the open market or in dark pools? Would it have something to do with traditional liquidity providers getting cremated in the current market as a function of usual mean reversion factors getting obliterated.

As was previously noted, the ample room for manipulating this shadow market has been the reason why none other than the SEC has started taking a much more cautious look at what goes on under the surface.

[R]egulators, exchanges and others have raised concerns that dark pools do not publicize their quotes, that there is a general lack of comprehensive data on them, and that some provide early messages, or "looks," to specific market players about upcoming orders.

"I am concerned that (undisplayed quotes) may not promote public confidence in the equity markets," James Brigagliano, co-acting director of the U.S. Securities and Exchange Commission's trading and markets division, told a major market structure conference in New York last month.

Most amusing is the response by Bank of Montreal's Doug Clark, managing director of quantitative execution services, on whether Canadian banks could launch dark pools: "There would be instant vilification from the rest of the public. So I don't think they're going to do it." So apparently even the "backward national park" to the north is sufficiently advanced to know not to dabble in a form of exchange which is essentially a platform for shady dealing to occur under the public's radar.

And yet, here in America, the investing public not only does not care about these underground exchanges but also welcomes them happily, because they "lower trading fees." But all is well - let's just leave all the dark pool regulation to the SEC. They have proven beyond a reasonable doubt that when it comes to issues such as market manipulation, be it by individuals or semi-nationalized corporations, they are a phenomenal first line of response. And in the meantime the general public will happily keep on buying stocks, unaware of what is really happening on the margin.

For those interested in more data on dark pools, attached is a dated piece by Rosenblatt Securities discussing some of the major aspects of this market, and also validating Goldman's Sigma X market dominance in significant detail.

Also, a good representation of how certain funds take advantage of micro block trading (which may or may not have been done on a dark pool), I refer readers to the following 13-G filed recently by Millennium Partner in Composite Technology Corp: amusingly Izzy Englander's firm discloses the stock offloading pattern in the Schedule A in vivid detail. It is a stunner.

Comments

[DONE_SONZ:]

"Dark pools," where orders are anonymously matched so that traders do not alert the wider market to their intentions, have triggered concerns that stock pricing may not be transparent.On the flip side,piling in or out of a position to create a buying frenzy or a sell off.

Jun 08 09:25 AM

[HBWOW:]

A year ago stock advisors/analysts denied that there was massive manipulation of the stock market, now one must think that there are only large manipulators sucking the life out of middle America investors/retirement holdings who rely on government regulators, regulations, SEC (this one is a big laugh), Congress, and the Fed to
be their watchdogs and enforcers. Yes, there are financial terrorists.

Jun 08 10:44 AM

[KirbyJF1:]

I think the small investor might as well start to with draw their funds from the U.S. Securities market, as there is no one there to protect them from the manipulators & the Biggest Wall Street Bankster on Wall Street. ((I believe the SEC is there just to settle disputes of the various Hedge funds & the Wall Street Banksters)) The Banksters have made the markets just a huge Casino & can move the price either up or down at will in order to cause huge swings in prices to create trading profits. It doesn't seem that the fundamentals make any difference for a particular stock , only the movement of the DOW,S&P, & Nasd 100 & with the huge Tax increases that will be forth comming, it doesn't make sense to risk capital for the Banksters & the government to take from us small investors. Just my opinion

Kirby

Jun 08 11:18 AM

[conceptwizard:]

Structural bear markets typically last 13 - 16 years so this one has a long way to go before completing the repair process. The current rebound is a bungee jump, very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.

Expect market manipulators today to produce similar price action going forward - to enrich themselves while trampling on the unwary, well-advised to protect their dollars from becoming quarters or dimes.

We're piling public debt on top of private debt to socialize the losses, and at some point the back of the Government's balance sheet is going to break, and if that happens, it's going to be a disaster.

Jun 08 11:18 AM

[Vienna:]

dark pools, wow - sounds like science fiction.

Hard to believe that something like this is allowed to exist in a FREE market .

I heard the US does have the most freest, most competitive and most productive market in the world, or is this just one more of the many fakes ???

"There would be instant vilification from the rest of the public. So I don't think they're going to do it." I suppose in Europe too.

Thank you Tyler for giving us another piece of great insight.

Jun 08 11:33 AM

[PainfullyAware:]

The Complexity Of Corruption Is Vast.

Transparency Is The Bane Of The Fraudulent.

The More I Learn About What Is "Over Looked", The More My Despair And Anger Grows.

Thanks Tyler For Roaming The "Fringe" And Giving Us "The View From The Edge".

Jun 08 05:47 PM

[overbet:]

I day trade and our firm clears through Goldman an we use Rediplus (Goldmans Trading Platform). Goldman is always trying to push sigma and dark pool on us. They guarantee that we will see better executions, but a few of the guys in my office tried it and said they noticed no better fills and no savings. What I found the most interesting in this article is how Goldman is the biggest player in computerized trading. This is interesting because we used to make a lot of money sending out thousands of bids and offers a dollar or two away from the closing print in after hours trading. This edge has been destroyed by computerized trading that constantly front runs your orders by .01. When you send the orders and try to jump in front of the program by a penny, the program is right back in front of you within a fraction of a second. I then tried to send 99 share lot orders because the program doesnt work against odd lots. Goldman shut me off the next day and I had to attest that I would never do orders less than 100 shares. Shady business.

Jun 08 10:33 PM

[vodka_tonic:]

interesting....why didn't you do 101 lots ?


On Jun 08 10:33 PM User 184769 wrote:

> I day trade and our firm clears through Goldman an we use Rediplus
> (Goldmans Trading Platform). Goldman is always trying to push sigma
> and dark pool on us. They guarantee that we will see better executions,
> but a few of the guys in my office tried it and said they noticed
> no better fills and no savings. What I found the most interesting
> in this article is how Goldman is the biggest player in computerized
> trading. This is interesting because we used to make a lot of money
> sending out thousands of bids and offers a dollar or two away from
> the closing print in after hours trading. This edge has been destroyed
> by computerized trading that constantly front runs your orders by
> .01. When you send the orders and try to jump in front of the program
> by a penny, the program is right back in front of you within a fraction
> of a second. I then tried to send 99 share lot orders because the
> program doesnt work against odd lots. Goldman shut me off the next
> day and I had to attest that I would never do orders less than 100
> shares. Shady business.

Jun 09 01:22 AM

[Alan Young:]

Is the volume spike we see at the end of each trading day a result of the day's dark-pool transactions being dumped onto the tape?

Jun 09 10:37 AM

[SivBum:]

I thought I am the only one with the problem. It has become a loser's game for individual traders like us in lower volume stocks. Big boys have crushed us.


On Jun 08 10:33 PM User 184769 wrote:

> I day trade and our firm clears through Goldman an we use Rediplus
> (Goldmans Trading Platform). Goldman is always trying to push sigma
> and dark pool on us. They guarantee that we will see better executions,
> but a few of the guys in my office tried it and said they noticed
> no better fills and no savings. What I found the most interesting
> in this article is how Goldman is the biggest player in computerized
> trading. This is interesting because we used to make a lot of money
> sending out thousands of bids and offers a dollar or two away from
> the closing print in after hours trading. This edge has been destroyed
> by computerized trading that constantly front runs your orders by
> .01. When you send the orders and try to jump in front of the program
> by a penny, the program is right back in front of you within a fraction
> of a second. I then tried to send 99 share lot orders because the
> program doesnt work against odd lots. Goldman shut me off the next
> day and I had to attest that I would never do orders less than 100
> shares. Shady business.

Jun 09 10:47 AM

[OldLimey:]

US markets are simply no longer a sensible place for small retail investors to place their money. Far too much manipulation, opacity, and outright dishonesty. Worse than quite a few emerging markets.

Jun 09 01:35 PM