Any other business

‘Dark pools’ are just another conspiracy of bankers against the public

Plus: What the ‘E’ in OBE should stand for; and the next property hot spot

It was at the Mansion House dinner last year that a City gent two seats away announced himself to be the custodian of one of London’s ‘dark pools’. The phrase sounded pleasingly Tolkienian but his first explanation — an electronic exchange in which large share transactions are completed in total privacy — dispelled the charm. My reaction was sharp enough to make the Downing Street spin-doctor between us fiddle nervously with his Twitter feed. If institutional investors can shift blocks of stock on the quiet, without moving public markets, what happens to the normal process of ‘price discovery’ between buyers and sellers? Surely small investors are being ripped off? Sounds like another market abuse to me, I shot along the table.

He set out to persuade me otherwise. Encouraged by regulatory changes designed to boost competition between exchanges to the benefit of investors — so I learned — dark pools (some independent, some run by banks, some as offshoots of public stock exchanges) have sprung up in every major market. They account for 15 per cent of US share trading but smaller percentages here and on the continent. Advocates claim their opacity actually makes them safer than public markets, where predators have more information to work with — so long as the pool managers themselves are honest, that is. As Wall Street commentator Larry Tabb puts it, ‘Dark pools are all the rage… Dark is hot, but is it good?’

The first criticism is that dark pools suck liquidity out of public markets. That can make dealing sticky for small investors, and Australia was first to take steps against it; Brussels, eager to regulate as ever, proposes an 8 per cent market-share cap on European pools. But what we now know is that the prime victims of hanky-panky in the dark are not the excluded small fry but the institutional clients (such as pension funds) who are invited in. It seems bankers have not been telling clients truthfully how much of their order flow has been routed through in-house pools, or who they might meet there, or whether the prices achieved are really the best available. Far from being safe, the pools turn out to be populated by sharks in the form of high-frequency traders (some of them also in-house) whose business is to scalp thin slices of profit by dealing microseconds ahead of institutional orders.


The scale on which this has been happening was revealed in Michael Lewis’s exposé Flash Boys earlier this year. There are at least 40 dark pools in the US, with every leading Wall Street and European banking name among the operators. And we learn more from a case brought against Barclays by New York attorney general Eric Schneiderman on the basis of evidence provided by former Barclays employees. What looked at first like another pushy American lawyer-politician picking on another soft British target is almost certainly the beginning of a wider furore to match the Libor, foreign exchange and Iran sanctions-busting scandals — and another round of massive, capital-depleting fines with knock-on damage to lending as well as to bank share prices.

As with Libor, Barclays happens to be the first target; others must certainly be in Schneiderman’s sights. But one jaunty little phrase attributed to a Barclays man in an email about misleading marketing material for dark-pool clients sums up so much that has happened in high finance over the past decade: ‘…happy to take liberties if we can all agree.’ I fear my Mansion House salvo was spot on after all: as I’d like to have added, when will you chaps ever stop conspiring against the public?

Most Excellent Order

To Buckingham Palace for an investiture, in support of a friend collecting an MBE for voluntary work in the arts. It’s probably a breach of etiquette to write anything at all about these exquisitely staged but media-free events, so I will confine myself to the observation that they are curiously democratic — saluting hairdressers, foresters and vets alongside the more obvious great and good. But as so often in British life, they offer minimal recognition for business success. Among 104 recipients of honours, just one was listed ‘for services to manufacturing’. She was Andrea Hough, managing director of AT Engine Controls, and she started her working life as a school-leaver apprentice in Hawker Siddeley before eventually leading a buyout of a factory at Worsley in Greater Manchester, where her company makes high-tech controls for Sea King helicopters and other applications. I’d also have given her an award for the best hat, and I think she deserves an extra wave. But wouldn’t it be good if the E in the OBE she received from the Prince of Wales stood for Entrepreneurs and Employment Creators?

Property hot spot

Is the housing market really starting to cool, or is the heat moving to unexpected places? The number of mortgage approvals in May was down almost a fifth from a peak at the beginning of the year — reflecting tougher affordability tests and slower processing as a result of the Mortgage Market Review in April, as well as fears of interest rate rises. Bank of England restrictions on high-risk lending announced this week will add to the dampening. Meanwhile, at the top end — the market for £10 million-plus London ‘super-prime’ properties — foreign buyers are reported by Knight Frank to be in retreat, deterred by the strength of sterling. As global recovery advances, the world’s rich are evidently less eager to sink fortunes into our bricks and mortar purely for safe-haven purposes.

But there’s still money coming in from the turbulent Middle East, an informed source tells me, and many new arrivals think family houses in central London have become too expensive by any global measure. So where are these sons of the desert now buying? My man taps his nose. ‘Keep your eye on Milton Keynes. They actually like the place, they get value for money, and they can shop at Bicester Village every weekend.’

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  • tjamesjones

    I’d really like to read analysis of dark pools by someone who has a clue. Unfortunately, Martin, you don’t seem to be the man.

    The fact is, roughly 40% of listed equities trading by volume has always taken place ‘off exchange’, normally executed as large block trades. This was true pre electronic trading, it has been true since electronic trading in the late 1980s. The figure of 40% is remarkably constant. These large institutional orders have always represented material information (it’s news if a big shareholder is selling, or buying). So the challenge for the buyer or seller is to execute their larger order while giving away as little information as they can (to avoid moving the market, and to avoid front running). But there will always be leakage – the broker(s) who execute the order, the counterparties who get wind of what’s going on. Regulators, brokers and exchanges have come up with various mechanisms to ensure the usual goals of fairness and efficiency – eg a rule that says block trades need to take place within [X%] of the bid ask spread over the past [hour]. etc.

    So the problem exists: large shareholders want to make large position changes with minimal market impact. Dark pools are one more attempt to address the problem, and the question you need to ask is do they make things BETTER or WORSE.

    • post_x_it

      The principal role of banks in today’s economy is to be fleeced for ever larger fines and compensation claims. This sort of analysis is counterproductive to that aim and must be suppressed at all cost.
      The latest wet dream of every politician is to impose fines so large that they deplete banks’ entire capital bases and then fine them for being undercapitalised.

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