Business reporters must be disappointed about today’s news that the S.E.C. might be getting rid of “dark pools” on Wall Street. Think about what you’ve got to work with if you write about the markets: dividends, derivatives, credit-default swaps–dark pools. It’s the only Street term that sounds like an M. Night Shyamalan movie, and–even better–it’s every bit as shadowy as it sounds.
You might recall we were intrigued–and also kind of wondered why these things weren’t regulated–back in February. We also explained in detail what a dark pool is, for those who have yet to be unitiated. Basically, it’s an electronic market where everyone bounces around not knowing who the buyers or sellers are, because they want to buy (or sell) at a certain price without their orders having an effect on the rest of the market. One dark trader (from our February piece) explains it better when he describes getting a lesson in darkness from an older broker:
[H]e goes, ‘If I wrote 100,000 shares down, and I went out into the crowd, anyone could look over my shoulder and see I had 100,000 shares to buy. Let me ask you a question, College. I walk in there with 100,000 shares to buy, and there’s 10,000 shares traded, and there’s no stock offered, what’s going to happen?’ I say, ‘Stock price is gonna go up.’ And he says, ‘Yeah, and I don’t want that to happen, do I?’ And I say, ‘I don’t think so.’ And he goes, ‘So, I’m not gonna do that. Don’t say what you’re gonna say: Why don’t I hold it close? Haven’t you ever heard the phrase hold your cards close to your chest? Everyone’s gonna know. So I put a smaller piece on here, and write reports. No one knows exactly how much I have to buy, and I know I have 100 to do, so it’s gonna look like I’m doing 25, and I’m gonna keep replenishing it. So I only have 25 on top, in case anybody sees it, and I have 100 below it.’ So that’s really what a hidden order is. It’s really a dark order—you don’t want to tell the world what you’re doing, but you want to buy it.”
Naturally, the S.E.C. couldn’t resist saying the dark pools–wait for it–“might need more light.”