On New Year's Day The New York Times posted a terrific article on their Web site by Graham Bowley titled "The New Speed of Money, Reshaping Markets". The article talks primarily about Direct Edge, "one of the top four stock exchanges in the United States"and the ramifications of all of the high speed trading that has dominated the markets the past decade, accelerated by mainframes and server farms the new exchanges utilize to bring you trades in a nanosecond. I was not aware of Direct Edge, or The BATS Exchange located in Kansas City, another large stock exchange that does all of the back-office work you don't see when you tap your iPod screen or click that mouse to make a trade.
The digerati have clearly taken over and although technological advances in the markets have reduced trading costs (at least if you use a discount broker), there is something ominous about these upstarts that are taking market share away from NASDAQ and the New York Stock Exchange at an alarming rate. In fact, according to Mr. Bowley: "The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.".
I've discussed dark pools before in other postings and are wary of them, especially since they are growing larger by the minute. To refresh your memory, a dark pool is a trading venue that doesn't quote prices publicly. This translates into a lack of transparency and I'm a firm believer in transparency and government regulation because without either one, we tend to get into trouble. It's like some of the institutional investors are playing with a marked deck. You give some of these white shoe firms an inch and they take a yard. Just look at The Goldman Sachs Group (GS) that recently was fined $550 million by the S.E.C. for fraud in the sub-prime meltdown. They were like used car salesmen knowingly selling you lemons.
I went to the Direct Edge Web site and on their FAQ page they state that The Goldman Sachs Group (GS), Citadel Securities and Knight Capital Group each own 19.9% of the exchange. You sharpen your pencil and that's 59.7% of the organization. Citadel Securities and Knight Capital Group are both major players in the dark pool arena. You can't tell the players without a scorecard and once the dust settles it's like you're dealing with Skynet, the artificial intelligence network that went haywire in The Terminator movies. If it weren't for the dark pools and flash trading that Direct Edge allows, I wouldn't have a problem with them, but I do because I believe it effects everyone on Main Street. IRA's, 401K's, pension plans and mutual funds that are the lifeblood of your Average Joe on the Street's retirement could be in jeopardy without proper government supervision.
I've got nothing against somebody trying to make a buck. I tip my hat to Direct Edge for coming up with a modern trading concept and padding their coffers, but there seems to be a conflict of interest when they are still dabbling in flash trading and dark pools. Supposedly you get a better price for your trade with dark pools if you are involved with high-frequency trading, but the little guy doesn't have access to Big Iron. Your discount broker may get you a penny more per share when you are buying or selling securities on these exchanges. Big deal. If left unattended, these exchanges may bring down the economy again. That's not good for anybody except for corporations like The Goldman Sachs Group (GS) who seem to make money no matter which way the wind blows.