NASDAQ, Dark Pools, Flip Flops, and Industry Advice in General


On days like today, we can’t help but feel sorry for the good folks at the Securities and Exchange Commission. They have been watching the markets become so insanely complicated over the last decade, and each day they grapple with the big picture questions around how they should mold our capital markets. They wonder if they should trust the opinions of the many economists and lawyers that they have on staff. They wonder if they should trust the advice of academics (as some of what they read is perhaps tainted by funding conflicts). They wonder if they should trust what the exchanges tell them. They wonder if they should trust what brokers and dark pool operators tell them. Of course, they also wonder if they should trust the advice from diverse conglomerate industry group lobbyists (like SIFMA), or highly focused lobbyists like Modern Markets.

And as if that were not enough to wonder about, they have to wonder if they should trust what staked participants say when they flip flop.


Remember when NASDAQ implemented the universally frowned-upon Flash Order, knowing it was wrong for the markets, because it served their economic interests? They did that because BATS implemented it down the street, and they were losing market share. After complaining to the SEC about the Flash Order, they flip flopped and created their own.

And although they are not always talked about in the same vein as BATS Global Markets with regard to the Hide Not Slide order-type controversies (think Haim Bodek), their systems had order types with nearly identical queue-jumping features as BATS and ARCA (NASDAQ did make changes in 2012 that corrected for some of these “unwanted features).

And more recently, in the dark versus lit debate, even after sponsoring academic research claiming that too much dark pool trading is hurting markets and the price discovery mechanism, and after writing a WSJ Oped claiming that “no one can argue with the healing power of transparency in the price-discovery process,” NASDAQ again is flip-flopping.

The WSJ’s Bradley Hope reports over the weekend that NASDAQ has approached several of the biggest banks with a proposal to take over the running of their dark pools. These pools have come under scrutiny in the last year by regulators for being less transparent than they should be, and for not appropriately policing trades. NASDAQ believes they have the credibility and trust as a steward for fair and orderly markets. And they now believe that maybe dark pool trading is not so bad that they can’t make money running it.

According to yesterday’s WSJ article, NASDAQ will make these new dark pool intentions known to the SEC shortly. The SEC staff will have to wonder whether they should trust 2015 NASDAQ, or 2014 NASDAQ, or 2012 Facebook NASDAQ.

Hopefully, the SEC staff will weigh industry advice with the appropriate weight. Hopefully they will realize that there are common sense fixes that need to be made (things like reining in customer segmentation, payment for order flow including dark pool practices and exchange fee practices) without regard for the business models of large participants. Hopefully they will realize that relying on the counsel of industry insiders for advice on how to shape the marketplace is what got us to the present state to begin with.


You can’t make this stuff up.