i had listened to some very smart people yesterday break down the sec proposed regulations of dark pools. to recap, the sec wants to change the threshold (the % market share that a dark pool would have to start sending their orders to the quote) from 5% down to .25%. the sec also says there will be a block trade exemption (good for liquidnet, pipeline, etc) of $200,000 (or on average 10,000 shares). they finally made comments that they intend to examine more closely high frequency trading in general, and colocation specifically, particularly  with regard to  inequality in the delivery of market data, and the creation of multi-tiered markets. anyways these smart people were pretty passionate about their belief that the regulation will force us back in time, and order flow will leave dark pools, where it at least is accessible, and go and sit on trader’s desks in their blotters, and market maker desks, where it is not accessible. they argue this will take us back in time to 1/4 point spreads and market maker shennanigans, and that this is a very dark day and time for US market structure. we disagree and ask  politely to spare us the theatrics. retail flow that feeds these marginal and perhaps toxic pools come from sweetheart-payment-for-order-flow-deals with online brokers. and institutional flow that feeds these marginal and perhaps toxic dark pools generally comes from smart routers in algorithms. as this is the case, what is coming into these dark pools is not a high quality 30,000 share order , but rather a smart router and algorithmic slice of perhaps 100-300 shares.  this order flow, in the public quote, will first of all bypass dark pool information sniffing and pinging in these marginal pools, and not be exposed to adverse selection. this flow, in the public quote, will narrow spreads in the small and mid cap names, which have seen their spreads widen in recent years. we also think that the sec light-shining will have the likely effect of making your block-trading dark pool fills chunkier as well. we can envision small and midcap spreads tightening, and marginal and predatory pools disappearing, or changing their models for the better. dark pools will still trade blocks, even more so. i think the best part of what the sec said yesterday is that they are looking at the unfair advantages bestowed on a few via colocation. they specifically mentioned market data delivery. this means they understand that flash and bolt and dark pool sniffing are just the tip of the iceberg. the real “secret of my success” in hft world is the advantage of their re-engineering the inside quote, and depth of book, throgh colocated servers and multiple trading destinations. so the market they see, and more importantly can access, is different from the market anyone else who is just looking at the consolidated quote sees (and can’t access, as the quotes are stale by that point). we know this is legal. we just dont think a multi-tiered market is fair. and mrs robinson shouldn’t have to pay hundreds of thousands of dollars in server rent, as well as millions in technology investments, just to be able to  access and see a real time piece of data that she can act upon. i think the sec is showing that they get it. i think this is why we will all hear no shortage of hft defenders coming out now and talking about how they have aided the market with their liquidity and stabilization presence. which brings me to one last point. why is that hft says they stabilized the market by buying on the way down in 2008 as the market fell every single day? doesn’t jive. we know they made billions. we know they go home flat position wise each day. so if that is true, and i believe it is, which is more likely? that they bought in the morning and sold at the end of the day, or shorted in the morning (perhaps nakedly) and covered at the end of the day?

ok i lied. i have one more point. the very smart people that feel this is a dark day for the market structure in the usa have recently asked their universe of contacts if they think the sec should investigate the quality of our markets. 44% of their respondents said no. Hmmm. who are these people? “nothing to see here, our markets are just fine, we have a history of doing the right thing and being able to self regulate ourselves against greed and potentially harming the public.” ok.