(This guest post originally appeared at the author’s blog)
So, I wrote this explanation of the reality of dark pools earlier today. Then, after having a few going away drinks with some friends, I read Taibbi’s piece “Goldman Lobbies Senate, Says Full Transparency Sucks,” which pretty much proved my point – that people railing against dark pools almost certainly don’t understand what they are angry about.
Goldman Sachs (GS) put out a presentation attempting to explain to the ignorant masses on the internet how the markets actually work. It’s a pretty decent presentation, which ZeroHedge has an even better version of here.
Now, let’s get to Taibbi’s analysis: “One friend of mine put it this way: say Goldman buys a big block of stock from a pension fund in a dark pool. Now they have shares they want to get out of and flatten out their risk. So where do they sell? Well, a big chunk of it might go to the retail schmuck who has no idea what’s going on. He’s buying 1000 shares of whatever at $28, not knowing that Goldman has another 50,000 shares to go. Next thing you know, the schmuck’s shares are at $27.”
You don’t have to be a professional trader to understand why Taibbi’s “friend’s” logic istotally crazy. In fact, I’d expect any intelligent journalist who endeavours to write financial articles with impact to understand this simple concept: If you’re Goldman Sachs, your business model is not, has never been, and never will be to buy large blocks of stock from pension funds in dark pools and then unload them on unsuspecting retail “schmucks” at lower prices. Buying at $28, selling at $27. Sounds like a barnburner business plan – sign me up! (/sarcsm).
There’s an old allegory about the farmer who bought watermelons for $10 and sold them at market for $9. His friend asked him, “How will you make money doing that?” “VOLUME!” He replied.
That’s basically what Taibbi’s suggestion is: that Goldman Sachs is buying large blocks of stock from pension funds, and turning around and selling small pieces of these blocks to poor innocent retail investors, thus driving the price down. Somehow, I guess Taibbi believes, GS will make up for it in volume! By the way – there is almost no reason for any retail investor to use dark pools – since retail investors don’t need to worry about other traders acting on their visible supply and demand – because it’s so small.
I went back and pulled another Taibbi quote on high frequency trading, just for the fun of it:
“The people who are actively innovating on Wall Street are all involved in the business of gaming the system to take advantage of short-term price swings. The people who invest money for the long-term and stick with their investments are punished in this environment.”
Hey Taibbi – guess what – that was my point: you’ve been complaining about high frequency traders scalping visible supply and demand, and now you’re complaining about the antidote to such high frequency traders. It may make for good click bait among the ignorati (I just coined that word, and I love it) – but it doesn’t make sense in the real world. Pick your battle – hate one or the other – or even neither – but as long as you hate both, you’re proving your ignorance.
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