Weekend Economists Mark D Day, 2014 June 6-8, 2014

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18. SEC Caught Dark Pool and High Speed Traders Doing Bad Stuff

http://www.bloombergview.com/articles/2014-06-06/sec-caught-dark-pool-and-high-speed-traders-doing-bad-stuff

I've said this before, but I really admire the way the Securities and Exchange Commission has responded to the recent uproar about high-frequency trading. A lesser regulator would have jumped on the bandwagon of HFT bashing, or even tried to get out ahead of it with its own anti-HFT branding.

The SEC, on the other hand, basically thinks high-frequency trading is fine, but it knows you don't think that, and it wants to be tactful. It could just explain that markets aren't rigged, but "markets are rigged" is sort of unfalsifiable. If the SEC says that the stock market is not a giant conspiracy to steal your money, that just means that it's in on the conspiracy.

So the SEC instead talks a lot about how it's going to fix the bits of markets that don't work quite right, and it does targeted enforcement against all the buzzwordy nemeses of fair markets. And it stage manages all of it carefully: After Mary Jo White's big market structure speech yesterday, the SEC today announced two market-structure enforcement actions, one against a dark pool and the other against a company that gave high-frequency traders access to the markets. The boxes, they are checked.

The dark pool, Liquidnet, agreed to pay a $2 million dollar fine for illicitly sharing its customer order data. That's bad! One of the main market-structure conspiracy theories is that dark pools -- which are supposed to be places where institutions can go and post big orders without anyone ever seeing them -- are actually secretly selling institutional order flow to high-frequency traders. So catching a dark pool in the act is a pretty big story for the SEC.