Wall Street Moves at the Speed of Light through Dark Pools

 

Earlier this week, I wrote about Wall Street’s remix of old securities into new packages, a practice known as “re-remics”.  Today, we're going to talk about another little known practice, called “dark pools”.  “Dark pools” are one of the ways that Wall Street gives stock-trading advantages to large institutional traders.  The “dark pools” are called that because they operate in the background, in the shadows, where no one would but the people on Wall Street know that they're taking place.  What they do is allow institutional traders to get advance notice of pending orders for buying and selling stock.  Given this information, these institutional trading desks are able to trade ahead of these pending trades sometimes nanoseconds or millionths of a second, in front of these other orders.  So, they have actual constructive access to what's going on, and the trades that are being made by other investors, before those trades are executed.

 

As Congressional Oversight Panels look into this practice, some on Wall Street are saying it's not that big a deal.  But from Main Street's view, it just looks like another way of rigging the playing field.  This points out, again, the huge divide between Wall Street and Main Street.  After Main Street, that is Taxpayers, helped bail out and salvage Wall Street firms, Wall Street seems to have returned to the practices it always has had, which create unfair advantages for a few.  These practices are basically illegal, and stack the deck in favor of Wall Street firms and their larger favored institutional traders like hedge funds and some banks.  It seems like an addicted individual, who after attending rehab paid for by a family member, simply can not give up their negative addictive behaviors.  Only in this case those behaviors cause not only resentment but unfair practices.  Oh and by the way most of these individuals involved are among the most highly paid people in the USA.  I think they would garner more sympathy if they themselves were struggling to get by like many Americans.  Instead it’s back to the days of excess.    

 

With all the populous talk going on these days, I do believe it's time to take a look at what is going on and Wall Street's ridiculous practices.  Yes, they've been going on since day one, but it's time to kind of shed a spotlight on these dark pools, and let people see what's going on, and let everyone operate from a fair platform.  A few years ago, there was a similar scandal when it was revealed that many mutual funds were allowing their top traders, clients, and their owners, to trade secretly and illegally after hours based on what had happened in the market that day.  For example, the owner of Putnam Funds (yes, Mr. Putnam) was convicted of investing and moving his own money after hours in clear violation of ethics laws.

 

You would think that people who are worth tens or hundreds of millions of dollars would have better things to do than scratch and fight to make some more money.  But I guess this is where their mind set is at.  Again, at a time when most Americans are considering it a victory if they can stay ahead or just pay their bills, it seems very out of touch for these practices taking place on Wall Street…

 

On Friday I’ll send out this week’s mortgage/financial markets update, and next week I’ll talk about some of the mortgage industry’s past excesses and how they continue to haunt us all.  To respond to my comments please send me an e-mail to iawerbuch@unitrustmortgage.com.

Thanks for listening…