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 boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.

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.

Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."

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