Nope…this is NOT a Chinese restaurant (shades of Big Trouble In Little China)…..I am talking about a financial dance that is causing a bit of concern, to say the least…..it is called “dark pool”, Dark Liquidity, and so on……basically it is market manipulation….does that sound familiar?  Could this be the next economic slide waiting to happen?

Okay, Professor…but what the hell is a dark pool?

Truly dark liquidity can be collected off-market in dark pools. Dark pools are generally very similar to standard markets with similar order types, pricing rules and prioritization rules. However the liquidity is deliberately not advertised – there is no market depth feed. Such markets have no need of an iceberg order type. In addition they prefer not to print the trades to any public data feed, or if legally required to do so, will do so with as large a delay as legally possible – all to reduce the market impact of any trade. Dark pools are often formed from brokers’ order books and other off-market liquidity. When comparing pools careful checks should be made as to how liquidity numbers were calculated – some venues count both sides of the trade, or even count liquidity that was posted but not filled.

Secret deals carried on in the dark…..just another way to create wealth by side stepping the regulations of proper and fair financial transactions…..stock trader, Keith Fitz-Gerald sees problems looming:

• First, as more volume moves to the so-called Dark Pools, the very notion of what constitutes “public pricing” becomes suspect. Practically speaking, if we’re seeing only 50% of the trading volume in a given stock, who’s to say that the pricing we’re seeing is accurate if the other half remains a mystery.

• Second, the small- and mid-cap stocks that for so long have been the domain of smaller investors will likely become harder to trade. The reason: Dark Pools will absorb the liquidity that’s presently out in the open, just as a ” black hole ” in outer space sucks in all the matter that’s nearby. The net effect could be that smaller transactions become more inefficient, or that public pricing actually disconnects from private pricing. Either way, individual investors may not get the best possible prices.

• Third, you can bet regulators will get interested if there is even a whiff of impropriety at the expense of smaller investors who perceive (and rightly so) that they are being “locked out” of the markets by the big boys yet again.

The question now is, will Washington do something to prevent yet another meltdown in the financial markets?  My guess would be…NO…they will do what they always do….wait and see….and we know just how successful that type of attitude has been in the last year or so…..