After Charges of Running a Price Fixing Cartel on Nasdaq in the 90s, Wall Street Banks Are Now Trading Their Own Stocks in Darkness

By Pam Martens and Russ Martens: June 3, 2014

On July 17, 1996, the U.S. Justice Department charged the biggest names on Wall Street, names like Merrill Lynch, JPMorgan and predecessor firms to Citigroup, with price fixing on the electronic stock market known as Nasdaq.

The Justice Department felt the firms were so untrustworthy to make a fair electronic marketplace that as part of its settlement it required that some traders’ phone calls be tape recorded when making Nasdaq trades and it gave itself the right to randomly show up and listen in on the traders’ calls. The scandal made headlines for years and revealed that the price fixing had been going on under the unwatchful eye of regulators for more than a decade.

Now, more than six years after the greatest Wall Street crash since 1929, the public is still learning stomach-churning details about the lingering effects of de-regulating Wall Street.

Yesterday we learned that the very same Wall Street firms charged with price fixing in the 90s have somehow conned their regulators into allowing them to own their own dark pools – effectively unregulated stock exchanges – and make markets in the stock of their very own Wall Street bank.

The Financial Industry Regulatory Authority (FINRA) – a self-regulatory Wall Street body (which under a previous name was responsible for missing the Nasdaq price fixing for more than a decade) released trading data yesterday for the dark pools operating the week of May 12 – 16. This was the first time such data has been released. The data releases are set to continue.

There are three major concerns that are immediately raised by the trading statistics: that Wall Street banks are allowed to make a market in their own stock inside an unregulated dark pool; that the other largest banks are making large markets in each other’s stocks; and why the public is just seeing a sliver of sunshine – instead of what went on in the previous 51 weeks or prior years of trading in these dark pools? Since the Wall Street firms knew this public data release was coming, it’s possible that higher trading volumes were previously occurring in their own and each other’s stocks.

Bank of America’s trading arm, Merrill Lynch, owns two dark pools, one of which is Instinct X. Last evening, FINRA data showed that during the relevant week Merrill’s dark pool, Instinct X, traded 8,207,150 shares of its own parent’s stock in a total of 16,246 trades. Merrill is now stating that it provided erroneous numbers to FINRA and the figure is really just 4,103,575 shares and 8,123 trades. A second Merrill Lynch dark pool, which goes by the letters MLVX, last evening showed it traded in its company stock to the tune of 66,200 shares in 94 trades. This morning, those figures have been cut in half.

Citigroup, which became insolvent during the 2008 crisis and required multiple bailouts from the taxpayer, owns a total of four dark pools according to a list posted at the SEC’s web site – none of which the general public has ever heard of: LavaFlow, LIQUIFI, Citi Credit Cross and Citi Cross. (The more dark pools a Wall Street firm owns the greater the concern that it could be trading between these pools to effectively paint the tape, i.e., manipulate the price of a stock.) Dark pools match buyers and sellers in the dark, without disclosing the bids and offers to the public marketplace.

According to FINRA data for the relevant week, Citigroup’s dark pool, LavaFlow, traded 645,756 shares of Citigroup stock in 1,838 trades while Citi Cross traded another 39,997 in 256 trades.

Merrill Lynch’s dark pool, Instinct X, has dramatically changed its data as to what it traded in Citigroup stock for the referenced week: last night it showed it was the largest trader among the dark pools in Citigroup stock with total shares traded of 1,791,492 in 10,282 trades. This morning those figures have been cut exactly in half, making it the seventh largest share volume trader in Citigroup for the referenced week among the dark pools. Ranking above it in share volume are, in order, the dark pools of Credit Suisse (CrossFinder), Deutsche Bank (DBAX), UBS, Goldman Sachs (Sigma-X), Barclays (LATS) and Morgan Stanley (MSPL).

Data for the same week for JPMorgan shows its dark pool, JPM-X, traded 826,614 shares of its own stock in 1,483 trades. JPMorgan ranked seventh among the dark pools for trading in its stock that week with the following dark pools trading a million or more shares of JPMorgan: Credit Suisse’s CrossFinder (1.9 million); UBS (1.57 million); Barclays LATS (1.15 million); Deutsche Bank’s DBAX (1.12 million); Goldman Sachs’ Sigma-X (1.07 million). Three of Citigroup’s dark pools — LavaFlow, LIQUIFI and Citi Cross — traded a total of 939,072 shares in JPMorgan.

Another serious concern that has arisen since the release of the book, Flash Boys, by bestselling author Michael Lewis, is the introduction of tricked up order types that let high frequency traders fleece the ordinary investor along with revelations that exchanges and dark pools are now offering payment for order flow and other cash incentives to attract trades from high frequency traders.

On September 22, 2009, Citigroup released the following press release concerning a new order type and rebate program at LavaFlow:

“Citi’s LavaFlow ECN has introduced a new order type, Hide to Comply, an execution instruction that allows liquidity providers to enter displayable limit orders at aggressive prices and obtain the best possible time priority at the order’s posted price level, all while receiving a rebate.

“Hide to Comply adjusts aggressively priced orders such that they are hidden on entry, and their limit price set to the opposite side of the national best bid and offer (NBBO). While hidden at this price, the order will be eligible for a full rebate. When the NBBO updates such that the order is no longer at a locking price, the order will be displayed at this new limit, maintaining its original time priority; the order will not be re-priced.”

We have asked the SEC to weigh in on how Wall Street banks, which caused the greatest economic collapse since the Great Depression, are allowed to make markets in their own stocks. We’ll update this article when we hear back.

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