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I stumbled onto this today.  I'm sure that this is old news to many people, but it's an election year and I would sure like to see this get front and center.

Dark pool investing, also known as a crossing network, allows traders to execute transactions without going through a stock exchange.

This is a really big deal financially because it puts the share price of companies into question.  There's the advertised price, and the real price.  Take a guess which one you get to see.

This article from The Market Oracle was very illuminating.

In an era in which "secret" transactions contributed to what's shaping up to be the largest credit crisis in history, you'd think that any mechanism that allows insiders to trade in complete secrecy and with total anonymity would be scrutinized more closely than a Roger Clemens vitamin shot . But that's not the case with Dark Pools.

As has long been the case, the old boys really do like to operate behind closed doors, on the other side of the "velvet rope" - beyond which the un-anointed daily working stiff may never pass. And Dark-Pool operators are only getting more private as computerized trading becomes more sophisticated and large-scale-order placement evolves into a science all to itself.

In any sane financial market, this would be illegal as all hell.  But this is apparently a global cheaters network sanctioned by stock exchanges world wide.

This is from NASDAQ itself!!!

NASDAQ offers the Intraday and Post-Close Crosses for all U.S. equities, including all stocks in the NASDAQ-100 and the S&P 500, and ETFs.

While offering deep pools of liquidity similar to those available in other NASDAQ crosses, the Intraday and Post-Close Crosses differ by:

   * Executing at the mid-point of the National Best Bid and Offer (NBBO) or the primary market closing price
   * Awarding executions on a pro-rata basis based on original order size
   * Allowing for large block trades without moving the market
   * Offering a full anonymous, blind match – no imbalance information is disseminated

Now imagine insider trading happening off the books and what you have is a loose confederacy operating as a secret stock exchange.

Imagine a scenario where you have stock in a company that is being sold off very quickly under the table.  While your price is $50 a share, the real price has dropped to $3 over the course of three weeks because the big boys know that the company is tanking.  You don't sell because you don't know and all of a sudden the price drops like a rock before you can act because most of the wealth has already left the company.

It's worse than plain old insider trading because the transparency is completely gone.

How bad is it right now?

According to the latest data, nearly 12% of daily U.S. stock-trading volume is presently conducted via the 40 or so Dark Pools operated by the " usual suspects ."

And it's growing:  Here's a snippet from this article:

To prevent information leakage, the minimum trade size is based on the stock's index participation - 25,000, 10,000 or 5,000 shares. "You can either trade or you can ignore it," says Gasser, who notes that, unlike Liquidnet, NYFIX Natural does not read the OMS blotter. So far, NYFIX is making Natural available only to a "selective group of buy-side firms as well as hedge funds with $2 billion in assets or more," he adds.

Meanwhile, there is talk that New York Stock Exchange member firms would like to see the Big Board develop a crossing network as part of its new Hybrid system. One sell-side executive sees the potential for an NYSE crossing network as a reaction to the changing market structure, and the desire to reverse the average trade size (now 400 shares) and the decrease in block trading taking place on the NYSE. "Everyone wants to be in the crossing space because institutions want to cross bigger blocks of stocks," says Joe Gawronski, COO at Rosenblatt Securities, an institutional agency brokerage firm that is a member of the NYSE.

These people have their own on-line newsletter!

People have invested in crossing network infrastructure.

LONDON--(BUSINESS WIRE)--Sept. 16, 1999--

Global Crossing (NASDAQ:GLBX):

-- New $35 million control center for worldwide fiber optic

telecommunications network.

-- Major traffic node and customer equipment site for Pan European

Crossing Network.

-- State-of-the-art operating system sets up global communication

links rapidly and provides management oversight from one central


What does this mean:

Dark Pool Downers?

While it's hard to say just how this will affect individual investors like us, my experience as a professional trader suggests that there are a few "realities" we can count upon.

As you might expect, not all of them are good.

Let's look at the top three:

   * First, as more volume moves to the so-called Dark Pools, the very notion of what constitutes "public pricing" becomes suspect. Practically speaking, if we're seeing only 50% of the trading volume in a given stock, who's to say that the pricing we're seeing is accurate if the other half remains a mystery.

   * Second, the small- and mid-cap stocks that for so long have been the domain of smaller investors will likely become harder to trade. The reason: Dark Pools will absorb the liquidity that's presently out in the open, just as a " black hole " in outer space sucks in all the matter that's nearby. The net effect could be that smaller transactions become more inefficient, or that public pricing actually disconnects from private pricing. Either way, individual investors may not get the best possible prices.

   * Third, you can bet regulators will get interested if there is even a whiff of impropriety at the expense of smaller investors who perceive (and rightly so) that they are being "locked out" of the markets by the big boys yet again.

On the other hand, maybe those regulators don't care at all. With the economy going the way it is right now, there's plenty more to worry about... like making it out of the water and back up onto the beach before the music stops and "you-know-who" grabs you from below......

Please rec this diary.  Maybe we can blow up this story for the election and give John "Little Bush" McCain another headache.  I'm just guessing here, but there are probably a lot of investors that would like to know about this.

This piece of crap just needs to be dragged into the open.

Here's a list of companies that are involved:

Independent dark pools

   * Instinet
   * Investment Technology Group (ITG)
   * Liquidnet
   * NYFIX Millennium
   * Pipeline Trading Systems
   * Pulse Trading

[edit] Broker-dealer-owned dark pools

   * BNP Paribas
   * BNY ConvergEx Group (an affiliate of Bank of New York Mellon)
   * Citi Markets and Banking
   * Credit Suisse
   * Fidelity Capital Markets Services
   * Goldman Sachs Execution and Clearing
   * Knight Capital Group
   * Lehman Brothers
   * Merrill Lynch
   * Morgan Stanley
   * UBS Investment Bank

[edit] Consortium-owned dark pools

   * BIDS Trading
   * eBX LLC

[edit] Exchange-owned dark pools

   * International Securities Exchange
   * The NASDAQ Stock Market
   * NYSE Euronext
   * Direct Edge

[edit] Other dark pools

   * Chi-X

   * Mismi

Originally posted to Craig Weiler on Thu Sep 18, 2008 at 10:00 PM PDT.

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