New Fidelity ‘dark pool’ set to gore high-frequency traders

New Fidelity ‘dark pool’ set to gore high-frequency traders

dark pool
Can the Fidelity-led dark pool, "Luminex," do to HFTs what the SEC would not? (Image via Wikipedia)

WASHINGTON, January 20, 2015 – Upon the initiative of trading and mutual fund giant Fidelity, that company and at least several other large institutions are already en route to setting up a substantial “dark pool” for their customers. It’s set to go live perhaps in early autumn, 2015.

From ZeroHedge:

According to the WSJ, some of America’s largest mutual funds and asset managers led by Fidelity Investments ‘are close to launching a private trading venue designed to let them buy and sell large blocks of stock without the involvement of Wall Street firms and high-speed traders, according to people familiar with the matter.

“The new venture is the who’s who of traditional asset management in the US and includes nine firms, including BlackRock Inc., Bank of New York Mellon Corp. , J.P. Morgan Chase & Co. and T. Rowe Price Group Inc., who are saying goodbye to ‘lit’ markets, i.e. public exchanges, ‘and forming a company that will operate a dark pool—a private trading venue that offers investors a degree of anonymity—the people said.’”

To oversimplify a bit more, “dark pool” is the generic name for private stock, bond and commodity trading clubs that don’t openly and continuously disclose their trades as must be done on regular public exchanges like the NYSE and the NASDAQ.

Dark pools have existed for years, and the Maven has found their existence to be both dishonest and annoying, striking yet another blow to free markets and open disclosure of prices to all.

But the Fidelity-led dark pool alleges a different motivation for its founding. It’s being put together as a defensive move against the massive HFTs and their illegal spoofing and front-running of trades which, interestingly, have come to victimize a great many mutual funds just as badly as they’ve damaged the dwindling number of retail traders.

By now, it’s reasonable to assume that the SEC has no intention of regulating HFT lawbreaking or even blunting it. Able to retire earlier than most American workers, and with better benefits, highly-paid SEC officials and worker bees alike don’t want to alienate the big private sector companies they’re supposed to regulate. Intending eventually to become double-dippers, these “public employees” bide their time, don’t make waves, and, upon retirement, hit up their friends (the ones they were supposed to be regulate) for even better high paying jobs while collecting their fat Federal retirement checks. The ones you paid for.

As a result of the SEC’s general abdication, the new Fidelity-led dark pool has decided to withdraw from open markets and open pricing and price trades amongst themselves instead. Divorced from exchanges and invisible to the HFTs, this dark pool has essentially been put together to do what the SEC should have done long ago, namely, terminate the HFTs branch and root. Simple, easy. No SEC (just as long as they observe certain rules). And better yet, no predation by the crooked HFTs.

In other words, at least as far as the Maven is concerned, the Fidelity-led dark pool, purportedly named “Luminex” (get it, Latin scholars?) is in reality a very big version of an old dirty trick that’s being deployed at least in part to gradually destroy a worse dirty trick. We fail to see how this increases transparency in the markets, since the whole idea is to avoid transparency. But that said, why have transparency at all if your only “advantage” is being nickeled and dimed to death by the greedy crooks who run the HFTs?

In other words, we hate this move by Fidelity and friends (not all of whom have been disclosed as of this writing). Yet we do recognize it as an entirely logical response to the SEC’s complete abdication of its regulatory role, so we’re not about to condemn this move either. In fact, it may very well benefit smaller investors in some ways.

That’s because a great many mutual funds−obviously including Fidelity’s−have been screwed over, performance-wise, by the HFTs, just as retail traders have. And since many retail traders and 401(k) holders invest in mutual funds like Fidelity’s, at least in part, they, along with the funds, could benefit by this move which may very well improve participating funds’ bottom lines.

And in fact, on some levels, this mega dark pool is actually an encouraging development. As the Federal government itself becomes ever more dysfunctional and sclerotic, some businesses, along with some states and municipalities, are striking out on their own and leaving the Feds on their own.

This slow, but likely inexorable move could develop further into an unexpected variation on “Galt’s Gulch.” That’s the place where Ayn Rand’s disgusted and creative captains of industry, the stars of “Atlas Shrugged” decided to withdraw, allowing corrupt socialist and statist governments to self-destruct, collapsing under their own greed and corruption. At which point, our Randian heroes would emerge to begin the lengthy but necessary task.

In this case, if SEC-regulated open markets are being gamed to the point where trading is no longer fair nor transparent, perhaps it really is time to exit these cesspools for a privately held dark pool. It seems that’s what all this has come to.

Sure, it’s a shame that taxpayers are shelling out for a government agency that no longer helps them or even responds to them. But if a sclerotic, cancerous government can’t be outright eradicated, then perhaps the next best thing is to evade it, agency by agency and ridiculous rule by ridiculous rule.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17