After continued publicity from the book Flash Boys, Goldman Sachs Group Inc (NYSE:GS) is considering discontinuing its dark pool, Sigma X, according to a report in the Wall Street Journal.
According to a Tabb Forum report, February average daily volume in the Sigma X dark pool was 75 million, as previously reported in ValueWalk. In February the Sigma X pool was the fifth largest dark pool by volume.
Dark pool dangers
The dangers of running a dark pool – and the increasing fragility to the core market structure the fragmentation and technical dispersion create – are coming into sharp focus. A recent Reuters report that said 40 percent of all US stock trades occur in dark pools also noted the growing concern among regulators abroad, many of whom are considering tighter regulation.
Regulators in Canada and Australia are moving to limit the growth of the opaque exchanges, with authorities in Europe and Hong Kong eying rules that would restrict trading on non-public exchanges. Perhaps most egregious to financial reformers are the fact that dark pools do not provide transparency into their exchange rules that provide material benefit to HFT firms. Not only do certain exchanges provide a list of special order types that allow HFT firms to display a market price that may not be available, but certain derivatives exchanges have written rules that provide HFT firms a method to “cut” in front of trade orders that had been resting on the exchange, something not disclosed in Flash Boys.
HFT crackdown expected
Goldman Sachs Group Inc (NYSE:GS)’s considering closing its dark pool comes amidst a likely crackdown on HFT exchange venues in the US and what is likely to be a storm of negative publicity that will likely force Congress and regulators to take tough action. As previously noted in ValueWalk, content of Flash Boys was said to have been leaked to certain major Wall Street banks and law enforcement officials well before its publication.
A few weeks before publication of the book, Goldman Sachs Group Inc (NYSE:GS) COO Gary Cohen wrote an Op Ed in the Wall Street Journal that seemed to be at odds with the goals of HFT firms. Days later, a memo was reported to have been sent to employees talking up the IEX exchange that was featured in Flash Boys. Speculation is Goldman considers the risks in HFT to significantly outweigh any financial gain, which could be fleeting as the technical costs are projected to continue to further reduce profitability of the strategy along with increased competition.
Goldman Sachs Group Inc (NYSE:GS) had operated their dark pool since 2006, adding $7.17 billion in 2013 minus accounting charges, according to the WSJ report. Goldman is also exiting the market making business, perhaps sending a signal relative to the future profit potential of the activity, as reported in ValueWalk.
