What post-crisis economy do we want? Financial exchanges vs. dark pools

June 7, 2009

In an op-ed on today’s New York Times, Sandy Lewis and William Cohan give voice to an argument that has been roaming through in specialized financial websites and blogs. Organized financial exchanges such as the New York Stock Exchange, the authors argue, are a fundamental part of any economic recovery.

Why isn’t the Obama administration working night and day to give the public a vastly increased amount of detailed information about what happens in financial markets? Ever since traders started disappearing from the floor of the New York Stock Exchange in the last decade of the 20th century, there has been less and less transparency about the price and volume of trades. The New York Stock Exchange really exists in name only, as computers execute a very large percentage of all trades, far away from any exchange.

As a result, there is little flow of information, and small investors are paying the price. The beneficiaries, no surprise, are the remains of the old Wall Street broker-dealers — now bank-holding companies like Goldman Sachs and Morgan Stanley — that can see in advance what their clients are interested in buying, and might trade the same stocks for their own accounts. Incredibly, despite the events of last fall, nearly every one of Wall Street’s proprietary trading desks can still take huge risks and then, if they get into trouble, head to the Federal Reserve for short-term rescue financing.

As it turns out, the Securities and Exchange Commission has been thinking long and hard about these issues. The paradox, however, is that we got to this situation thanks to a regulatory reform, “Reg-NMS,” promoted from the SEC itself. By requiring NYSE specialists to respond within a second to the orders of brokers, live trading on the floor of the NYSE was fundamentally challenged. Ironically, the objective at the time was to promote transparency.

3 Responses to “What post-crisis economy do we want? Financial exchanges vs. dark pools”

  1. Marc Lenglet Says:

    The funny part of it is that Europe’s MiFID, while promoting the same market ethos (increased competition, transparency regimes), allowed for and facilitated the emergence of such liquidity pools.

    There is an on-going debate in Europe on the place dark pools should be granted, since regulators have now understood that market actors have not been waiting to read the text through its regulatory holes and take advantage of every discrepancy the can find.

    To measure the distance between practices and regulatory framing, one can refer to http://www.thetrade.ltd.uk, “…a quarterly publication focused on the business of institutional global securities trading” and dedicated to the buy-side.

  2. danielbeunza Says:

    Marc — interesting comment. I could not agree more. Seems like this is a classic case of events going much beyond the anticipation of regulators. In the US, the most helpful source I have found is Traders Magazine, and specifically the articles by Nina Mehta:


    My sense is that the technology and regulation of financial exchange is going to be a critical testing ground for different theories of market microstructure… orthodox, behavioral and sociological.

  3. Safelaws Says:

    Yes The New York Stock Exchange really exists in name only, as computers execute a very large percentage of all trades, far away from any exchange.

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