Dark Pools Pervade Wall Street

Shah Gilani

I'm not usually the kind of guy to say, "I told you so."

But you know what? I'm saying it.

I told you so.

Dark pools – private markets unavailable to the public – and high-frequency trading are manipulative schemes run amok.

They weren't always. Both were the result of unintended consequences. But that's all behind them. In front of them now are civil and criminal lawsuits.

Late yesterday, New York State Attorney General Eric Schneiderman charged Barclays Plc. with fraud over how it markets its dark pool and how it operates it.

In a press conference yesterday after the market had closed, the AG said, "Barclays dramatically increased the market share of its dark pool through a series of false statements to clients and investors about how and for whose benefit Barclays operates its dark pool. Contrary to Barclays' representations that it implemented special safeguards to protect clients from aggressive or predatory high frequency traders, Barclays is accused of operating its dark pool to favor high frequency traders."

But that's not all Barclays did. Keep reading, and I'll explain all…

Dark Pools: Diving In

Barclays not only omitted pertinent information and facts about high-frequency traders' (HFT) access to their dark pool, but they falsified written material and presentation slides in a way that smacks of blatant fraud.

The promised protections were missing, among them limiting "predatory" players from the dark pool. And Barclays also allowed anyone into the dark pool.

Far worse, their own HFT desks were in the pool picking off clients.

The marketing material was obviously influential in attracting clients. Barclays' dark pool became the largest in the United States. There are some 50 dark pools operating in America – that's on top of 11 public exchanges.

And you can bet your bottom dollar there was money involved. According to market research firm TABB Group, the top three dark pools operated by Barclays, Credit Suisse, and UBS earned about $800 million in commissions in 2013.

That's just commissions, folks. There's no clarity on how much they made on their high-frequency trading, much of which was earned by reading their clients' dark pool orders and front-running them. My guess is that they made billions off their dark trading.

And here's what I'm predicting is headed our way next:

Join the conversation. Click here to jump to comments…

Shah Gilani

About the Author

Browse Shah's articles | View Shah's research services

Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

… Read full bio