By Pam Martens: January 21, 2019 ~
In 2014 Citigroup Had Six Separate Trading Venues, Including Dark Pools
It is destined to go down as one of the greatest journalistic and regulatory failures of our time – the lack of serious attention by investigative business reporters and the U.S. Department of Justice to the glaring fact that the largest Wall Street banks continue to trade their own and each other’s bank stocks in their own Dark Pools.
Dark Pools function as unregulated stock exchanges inside the bowels of the largest Wall Street banks. Making the situation even more dicey, some of the big banks own more than one Dark Pool, raising the possibility that there could be cross-trading between those pools to artificially inflate or depress stock prices.
JPMorgan Chase owns two Dark Pools; Citigroup currently owns at least two although it owned a lot more in the past; Morgan Stanley owns three; and then there is the Dark Pool that a consortium of Wall Street banks quietly own together. That one is called Level ATS. According to Wall Street’s self-regulator, FINRA, Level ATS is owned by Citigroup, Credit Suisse, LB I Group, Merrill Lynch LP Holdings, and Fidelity Global Brokerage Group.
After being repeatedly charged with collusion, should global banks be allowed to team up on the darkest of trading markets, i.e., Dark Pools? Should felon banks like Citigroup and JPMorgan Chase be allowed to trade the stocks of their own bank? Should any Wall Street bank be allowed to trade its own stock in darkness?
Following the great stock crash in 1929, the U.S. Senate Banking Committee conducted an extensive investigation over three years into the trading structure and trading practices on Wall Street. What it found was a vipers’ nest of corruption and collusion. The Senate investigations focused extensively on the dirty dealings of “Pools,” now reincarnated as Dark Pools. The Senate 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 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.”
Today, the Securities and Exchange Commission, the Justice Department, and the hundreds of journalists who cover the Wall Street beat, remain eerily silent about the fact that Wall Street banks are trading their own stock and those of their peer banks in venues that lack public transparency. Journalists were not always so quiet.
Scott Patterson created a buzz in 2013 when the paperback release of his earlier hardcover book was titled: Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market. Patterson reaches a seismic conclusion, writing: “The title of this book doesn’t entirely refer to what is technically known in the financial industry as a ‘dark pool.’ Narrowly defined, dark pool refers to a trading venue that masks buy and sell orders from the public market. Rather, I argue in this book that the entire United States stock market has become one vast dark pool. Orders are hidden in every part of the market. And the complex algorithm AI-based trading systems that control the ebb and flow of the market are cloaked in secrecy. Investors – and our esteemed regulators – are entirely in the dark because the market is dark.” (Italics are as they appear in the book.)
Rigging of the stock market was also what veteran Wall Streeter and bestselling author, Michael Lewis called it when he appeared on Sixty Minutes on March 30, 2014 to talk about his latest book, Flash Boys. The exchange went like this:
Steve Kroft for 60 Minutes: What’s the headline here?
Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism is rigged.
Steve Kroft: By whom?
Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.
Steve Kroft: Who are the victims?
Michael Lewis: Everybody who has an investment in the stock market.
As we’ve previously noted, Lewis is not some wild-eyed conspiracy theorist or crank. Lewis holds a degree in economics from the London School of Economics and previously worked as a bond salesman on the trading floor of Salomon Brothers. His books have consistently been New York Times bestsellers.
On June 2, 2014, to throw a few crumbs to the public after all that talk about Dark Pools and rigged stock markets, FINRA, the deeply conflicted self-regulator on Wall Street, began to report to the public three-week old trading data from the Dark Pools. But that trading data was about as transparent as a mud splattered window. Instead of daily trading reports, with execution times included, the data is lumped together for the entire week. If a curious 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 when its share price was plunging, that’s also impossible to do.
What we do know is that there is a hell of a lot of trading by the same global banks in the stocks of the same global banks. Take, for example, the week of December 3, 2018 – a month when the share prices of global banks fell out of bed. In that week, Dark Pools traded 6,761,313 shares of JPMorgan Chase’s stock in 41,898 separate trades. The vast majority of the JPMorgan Chase shares traded in Dark Pools (71 percent) were made by only seven global banks, including JPMorgan Chase itself. The UBS Dark Pool (UBSA) was responsible for 1,668,238 shares or 25 percent of the total JPMorgan shares traded in Dark Pools; the bank consortium called Level ATS traded 805,798 shares; Credit Suisse’s Crossfinder Dark Pool traded 668,453 shares; Goldman Sachs’ Sigma X2 traded 457,701 shares; Deutsche Bank, the global bank that lost 58 percent of its share price last year, traded 424,900 shares of JPMorgan Chase that week in its Dark Pool known as SuperX; one of Morgan Stanley’s three Dark Pools, known as ATS-4 traded 404,800 of JPMorgan Chase’s stock that week; and JPMorgan Chase itself traded 349,305 shares in 1,790 separate trades in one of its two Dark Pools known as JPM-X.
Even larger amounts of Dark Pool trading occurred in the stocks of other global banks, with big participation by the banks’ own Dark Pools. Bank of America, which owns Merrill Lynch, saw 44,946,549 shares of its stock traded in Dark Pools for the week of December 3, 2018 in a whopping 133,671 trades. Citigroup had 11,159,604 shares traded in 57,704 trades.
That’s an awful lot of darkness for a U.S. stock market that crashed under the weight of corruption on the part of these same global banks just a decade ago.
