By Pam Martens and Russ Martens: June 13, 2019 ~
Dark Pools are opaque stock trading platforms operated by the largest Wall Street banks and other firms. They are, effectively, stock exchanges but have been given exemptions by the Securities and Exchange Commission (SEC) from having to register as a stock exchange or to submit to more rigorous oversight by the SEC.
The rationale for the existence of Dark Pools owned by the mega banks has escaped the public since these are the same banks that are serially fined for abusing the public’s trust and rigging other markets like foreign exchange, Libor, and the Nasdaq stock market in the 1990s. Their conduct was so bad in the Nasdaq matter that they were forced to submit to having their trading phone calls taped and reviewed by regulators.
Wall Street On Parade has written extensively about the highly suspect transactions that are taking place in the Dark Pools of the mega banks, the most outrageous of which is the trading of their own bank stock. (See related articles below.) The SEC has also repeatedly fined and sanctioned the Dark Pools of the biggest Wall Street banks which has had little effect on stopping the abuses.
On July 18 of last year, the SEC, in a unanimous vote, decided to require more public disclosure from each Dark Pool about how it conducts its business. The more detailed public disclosures were to be provided on a new form called an ATS-N.
What happened next was that after years of being listed as operating a Dark Pool (also known as an ATS or Alternative Trading System) on the SEC’s monthly ATS List, every major Wall Street bank’s Dark Pool disappeared from the list as of this past February.
One of those Dark Pools has now decided to cease operations. A spokesman for Citigroup has confirmed that it has ceased operating its Dark Pool known as CitiCross. A filing at FINRA also shows that Citigroup has terminated its registration for Citi Order Routing and Execution LLC, which was the subject of a major fine and enforcement action by the SEC last year for illegally operating as a stock exchange without permission or oversight from the SEC. Citi Order Routing and Execution LLC had operated the Dark Pool called CitiMatch.
The official statement from Citigroup on the matter is this:
“We have decided to shut down the CitiCross ATS as part of a strategic review of our Equities Business. We continue to invest in talent and technology to drive wallet share growth in Global Equities.”
Wall Street On Parade previously reported in 2014 on a dizzying array of Dark Pools and trading platforms at Citigroup. (See Citigroup’s Dark Pools: Here’s Why the Public Doesn’t Trust Wall Street.) At that time, Citi Order Routing and Execution LLC went by the name of Automated Trading Desk or ATD, which stated on its web site at the time that it was trading “200 million shares a day,” the equivalent of a billion shares a week. Unspecified amounts of ATD’s assets were sold to Citadel Securities in 2016.
Citigroup is still operating a Dark Pool known as CitiBLOC. The more rigorous disclosures under the new ATS-N form it filed earlier this year was not up to snuff, according to a notice posted on the SEC’s website. It reads in part:
“The initial Form ATS-N disclosures and discussions with Commission staff have revealed complexities about the operations of Legacy NMS Stock ATSs including, among other things, matching functionalities, means of order entry, order interaction and execution procedures, conditional order processes, segmentation of orders, and counterparty selection protocols. The Commission staff needs additional time to review novel and complex issues such as these, which Commission staff has discussed with CitiBLOC. Extending the initial Form ATS-N Commission review period for an additional 120 calendar days will provide Commission staff an opportunity to continue its review of the initial Form ATS-N disclosures and discussions with CitiBLOC…
“In addition, the staff has been engaged in ongoing discussions with CitiBLOC about its disclosures and manner of operations, as well as the requirements of Form ATS-N, to facilitate complete and comprehensible disclosures that reflect the complexities of those operations.”
Statements from the SEC that are almost identical to the one above appear on the SEC’s website for every major Wall Street mega bank’s Dark Pool. The SEC statements on JPMorgan’s two Dark Pools appear here and here; for Morgan Stanley’s three Dark Pools see here, here and here; and for UBS see here.
Merrill Lynch has filed a cessation of activities for its Dark Pool Instinct X, which simply appears to be moving to a unit of Merrill’s parent, Bank of America Securities, according to an amended ATS-N form filed with the SEC. Wall Street’s self-regulator, FINRA, reports that Instinct X traded 62,624,709 shares in 276,209 separate trades for the most recent reporting week of May 20.
UBS, which regularly operates the largest Dark Pool by trading volume, traded 504,383,608 shares in 3,865,546 separate trades for the week of May 20.
FINRA reports these trades on a three-week delay with no trade dates or times the trades occurred. This prevents academics from spotting patterns of insider trading or other trading abuses.
Dark Pools are referred to as “unlit” markets because the public can see very little about what is going on. In a speech delivered by Brett Redfearn, SEC Director of the Division of Trading and Markets on June 3 of last year, he said that dark pools “in aggregate,” are responsible for “14 percent of listed equity volume.” That figure does not include over-the-counter stocks. According to a report in the Wall Street Journal using data from the Tabb Group, “the share of U.S. stock trades executed on dark pools and other off-exchange trading venues rose to 38.6 percent in April, the highest level in more than a year,” which was “up from 34.7 percent in December.”
That’s a lot of trading in a dark hole for a so-called “fair” and “efficient” market.