Day: May 2, 2012

Dark pools may be dying off (and why that is and what that is a good thing)

I think that because of this recent bit of news: Goldman gives up on Canadian stock market – The Globe and Mail.

Goldman unveiled the market in August of last year, setting it up as a so-called dark pool in which traders could transact anonymously. The idea of dark pools is to enable buyers and sellers to put up orders in secret, which are then matched by computer systems, as opposed to so-called lit markets like the TSX where orders are posted for all to see.

I thought this could just be a Canadian story, but this story (Off-exchange trading: Some like it not | The Economist) indicates that dark pools were in trouble even as Goldman Sachs was entering the Canadian market.

Here’s a chart from the Economist:

You can see not only the number of dark pools levelling off, but the volumes traded too.

Why is that? Well, in the Globe, it mentions “a tough new set of rules recently put out by regulators on dark pools”, and the Economist states “Grumbles by institutional investors give regulators more excuse to get involved.”

It they are dying off or at least levelling off because of regulation, that will be good thing. To me there is too much potential for things to go seriously wrong in such markets. The words “anonymous”, “secret”, “high speed”, “automated” come up often in discussions about dark pools, and those words combined are a recipe for disaster. I don’t expect the banks and traders to have learned any lessions from the last big crash, but I would hope the regulators have. If not, we could all be in for alot more problems.

Some further thoughts on asking Paul Krugman a question on Reddit

So I asked Paul Krugman a question today when he appeared on the site, reddit. Not only did he reply with a great answer, here: IamA Nobel Prize-winning economist and New York Times columnist. : IAmA, but he followed up with an excellent post on his blog, here: Diocletianomics – NYTimes.com.

Paul Krugman and I have a few things in common: we both like economics, blogging, Isaac Asimov’s Foundation novels, and posting about indie bands (him: Friday Night Music: Civil Wars, me:Great Friday night music: Never Forget You by the Noisettes). Politically we are similar too. I am a fan of his writing and thinking. Alas, I do not have a Nobel Prize.

When I saw he was going to be on reddit, I actually signed up for it just to ask the question. The question may seem bizarre out of context, but it is really a mashup of serious things he’s been discussing (the FED and it’s role, the problem posed by the zero lower bound) and the not so serious (the emperor Diocletian came up in the context of a debate he had with Ron Paul; more on that here: Don’t Know Much About (Ancient) History).

I thought mashing that up would not only appeal to the tastes of reddit readers, but to Paul Krugman and his good sense of humour. I was right!

What is the question, you ask? It was this: What is the FED doing to help the Emperor Diocletian escape the zero lower bound?

It’s a good question, I thought. One that might come from a character in a Lewis Carroll book, one that gets you thinking despite the absurdity of it. In some ways, Ron Paul could be a character in a Lewis Carroll book. But I will leave that for another blog post.