By Pam Martens and Russ Martens: February 26, 2018
On Monday, February 5 and again on Thursday, February 8, the Dow Jones Industrial Average closed the day with more than 1,000-point losses. We decided it might be instructive to see what JPMorgan’s Dark Pools were up to that week now that the three-week old data has been released by the self-regulator FINRA. We’ll get to that shortly, but first some necessary background.
Dark Pools are effectively unregulated stock exchanges that operate in darkness inside Wall Street’s largest firms. If you have been following the past decade of criminal felony counts for colluding in market rigging and multi-billion dollar fines for abusing the public against these same firms, you might be forgiven for thinking that Federal regulators have lost their minds to allow these same firms to operate Dark Pools. But it’s actually worse than it first appears: not only are JPMorgan Chase, Citigroup, Goldman Sachs and other Wall Street banks trading stocks in darkness, but they’re being allowed to trade the shares of their own bank in these Dark Pools, as well as that of their peer banks.
And, it’s even worse than all that. In addition to trading the bank stocks of their competitor Wall Street banks with whom they have major derivative exposure and engage in underwriting syndicates, they are also allowed to issue buy, sell and hold stock research reports on their competitor banks, despite all of the major Wall Street firms being charged with fraudulent or deceptive research practices by the Securities and Exchange Commission in 2003.
To give the weak appearance that the public has some insight into what’s going on in these Dark Pools, FINRA – the deeply conflicted self-regulator – began reporting three-week old trading data to the public on June 2, 2014. But the data is lumped together for the entire week. It doesn’t show any individual day’s data; it doesn’t show what time the trades were made. So, for example, if an investigative reporter or scholar wanted to see if trades were bunched at the open or close of trading in order to manipulate the markets, that’s impossible to do. If public investigators wanted to see if a Dark Pool did heavy buying in its own stock during a period of the trading day when its share price was plunging, that’s also impossible to do.
After the stock market collapse in 1929, the U.S. Senate Banking Committee conducted an extensive investigation over three years into the trading practices on Wall Street. (No such intensive trading investigation was conducted after the 2008 Wall Street crash.) Much of the Senate investigations of the early 1930s focused on the dirty dealings of “Pools,” now reincarnated as Dark Pools. The Senate report found the following:
“A pool, according to stock exchange officials, is an agreement between several people, usually more than three, to actively trade in a single security. The investigation has shown that the purpose of a pool generally is to raise the price of a security by concerted activity on the part of the pool members, and thereby to enable them to unload their holdings at a profit upon the public attracted by the activity or by information disseminated about the stock. Pool operations for such a purpose are incompatible with the maintenance of a free and uncontrolled market.”
The report noted further:
“The testimony before the Senate subcommittee again and again demonstrated that the activity fomented by a pool creates a false and deceptive appearance of genuine demand for the security on the part of the purchasing public and attracts persons relying upon this misleading appearance to make purchases. By this means the pool is enabled to unload its holdings upon an unsuspecting public.”
The Senate Banking Committee of 1934 concluded as follows:
“The conclusion is inescapable that members of the organized exchanges who had a participation in or managed pools, while simultaneously acting as brokers for the general public, were representing irreconcilable interests and attempting to discharge conflicting functions. Yet the stock exchange authorities could perceive nothing unethical in this situation.”
Given that background, consider the following. During the week of February 5, 2018 that saw the two separate 1,000+ point plunges in the Dow Jones Industrial Average, JPMorgan Chase – which is one of the 30 stocks in the Dow Jones Industrial Average and has been charged with three criminal felony counts in the past four years — was operating two Dark Pools. One is called JPM-X. That dark pool traded 222,220 shares of JPMorgan Chase’s own stock in 1,567 separate trades.
But according to Reuters, last year on July 17, JPMorgan Chase started an additional Dark Pool it called JPB-X. That Dark Pool had a very peculiar plan. According to Reuters, JPB-X would allow JPMorgan’s clients to “use the bank’s algorithms to buy or sell stocks at a benchmark price reached over a period of time.” (If you think that’s a squirrely concept for fair and accurate price discovery in a stock market, you’re not off base.)
During the week of February 5 that saw the two 1,000-point plunges in the Dow, JPB-X traded 92,364 shares of JPMorgan Chase stock in a total of 954 separate trades. If you add the two JPMorgan Dark Pool trades together, that 2,521 times in one week that JPMorgan engaged in trading its own stock. (Other banks also traded in their own stocks that week. We looked specifically at JPMorgan Chase because it’s the only U.S. bank with 3 criminal felonies that it has admitted to.)
If you are trying to figure out why the retail investor has lost confidence in Wall Street, look no further than how these Dark Pools are allowed to operate by their so-called regulators.