interesting article yesterday on Dark Pools representing now in excess of 40% of all equity trades. Uk and Canada have already taken action to improve transparency. Conclusion was ,it was harming the transparency and trustworthiness of US exchanges, which are now basically dominated by computerised HF trading......will lead to loss of trust and competitive edge if continues to trend in this direction.
Oh, and I was illuminated to find recently why retail order flow is so valuable -- it's identifiable as retail order flow and they keep it identifiable. People can play trading tricks on retail, over and over, that would be hopelessly naive against other sharks. Perfectly legal as far as I know. But once you know for sure there are no sharks in the pool -- and naturally no lifeguards -- we're all good libertarians after all -- at that point you can get a lot more aggressive with whatever mix of defenseless sea life is left over.
To overstretch my pool metaphor, of course if you're hunting litle children and baby seals and so forth, and especially once you're 100% sure you're the apex predator, you want the pool water as clear and well-lit as possible. In a dark pool us turtles would get a lot fewer toes bitten off.
To me, all this is not a serious argument against value investing (including risk arbitrage plays like Berkshire BV). But it is an argument against trading in and out every day.
I coined the saying, "Some want to be sharks and others, dolphins. But nobody wants to be tuna." for the same problem.
" Perfectly legal as far as I know. " Well, yeah. The underlying rules of the game. Retail has a horrible tendency to think that what they don't know about "must be illegal."
On another hand, if there are ONLY sharks in the pool, things can stay calm-- as one of my preferred office spaces--near the shark tank in the Golden Nugget demonstrates.
Transparency sounds good and darkness sounds bad, but it may be is a tricky issue, Hbird. There are plenty of both transparent pools and dark pools, off the well-known exchanges. My understanding is transparency helps the mainstream HFT people shave pennies against say actively-managed mutual funds. (An index fund is gonna get clipped very very little because it tries not to trade.) So that's where a lot of the demand for dark pools comes from, if I understand correctly -- from big players trying to hide from the HFT algorithms.
good and bad, yes, but if it continues to trend to Dark pools, which apparently has tripled in the last few years, then there is really no way to know what price should prevail, the market will be fractured, and likely, as you imply above, retail will draw the short straw, or lose confidence altogether.