DARK POOLS AND 1929

One of the reasons that the stock market and the U.S. economy collapsed in 1929 was because of the sheer number of trades that were done without client knowledge. Many trades were done not because they were good investments but, rather, because market players got bigger and bigger commissions for each trade they made - whether the trade paid off or not. Because the market kept on rising clients didn't complain, so even more trades were made. Volume trades paid handsomely.

When market players weren't busy trading their client's shares - and raking in big commissions - commercial and investment banks often simply took bank deposits that they had in their institutions and used it to speculate and bet on the market. This was depositor - and not the bank's - money.

As you can imagine, with lax requirements, this often left banks with as little as $20-50 in their vaults when they opened up for business. But depositors didn't care because everyone was going to get rich. This shady and free-wheeling market environment eventually caught up with market players in 1929.

Incredibly enough, in spite of the market collapse last year, we may be doing the same thing (with taxpayer bailout dollars) all over again.

In this MSNBC segment Dylan Ratigan points us toward yet another market niche that allows market players to make trades without the knowledge of their clients, or even their industry competitors: Dark Pools.


In a few words, Dark Pools are trades that are made without the market player advertising or alerting others about their activities. While one market insider argues that Dark Pools allow market players to "minimize information leakage, manage market impact and execute block trades at beneficial prices" what he's really saying is that "if no one knows what we're doing we can get a better price for the product we're buying because no one will rush in to bid up the price." Market players on the sell side benefit because they don't have to pay exchange fees.

Put more simply, Dark Pool market players like operating in secret because it makes them more money. Better yet (for the traders), it allows market players to used the "dark venue" to speculate and bid up demand (and prices) on products they may bought earlier on the open exchange.

So, how big is this Dark Pool market? Pretty big. At the beginning of 2007 Dark Pools made up 10% of total market trading. Today it makes up to 15% of total market trading.

At this time, free market purists might say, "What's the big deal? As long as trades are made and people make money, it's all good." Wrong.

Because the amount of Dark Pool trading has grown so strongly market players have complained that it has become increasingly complex and difficult to find and execute trades in open and regulated markets. Worse, market players who have expressed concern about Dark Pool trading have made it clear that they worry about "the potential loss of underlying functionality."

In plain English they think Dark Pool trading has the potential to collapse the logic of the market ... like in 1929

- Mark