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Dark Pools and Stealth Exchanges Mean Unregulated Stock Markets

Big Money in the Dark (graphic by thewhitestdogalive via Flickr)

Big Money in the Dark (graphic by thewhitestdogalive via Flickr)

There exist in the financial world “dark pools,” rather like black holes in space; they are private stock exchanges which are all but invisible to regulators. The New York Times describes them as “stealth exchanges.”

These stealth markets enable sophisticated traders to buy and sell large blocks of stock in secrecy at lightning speed, a practice that has drawn scrutiny from the Securities and Exchange Commission.

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“Competition has benefited the average investor,” said William O’Brien, chief executive of Direct Edge, one of the new exchanges. “Their broker has so many choices available, on or off exchanges, anywhere in the world, and they can get their order executed in less than a second.” Critics maintain that only the most sophisticated players are benefiting, able to execute their trades seconds before smaller investors and in private.

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Unlike the Big Board, the new electronic exchanges are virtually unknown outside financial circles. Direct Edge, the largest, is in Jersey City. Another, the BATS Exchange, is based in Lenexa, Kan. Both are only about five years old. But each now accounts for about a 10th of daily United States stock trading.

Understand this: these private exchanges fall between the raindrops of traditional securities exchange regulation. They allow big institutional clients to execute their trades before you can with your personal account. You know the whole argument in favor of net neutrality? Well, the same applies to exchange neutrality. It means the big boys can beat you to the bargain, even though you may have placed your order with your personal broker earlier than them. In a crashing market, the big boys can get out earlier, too.

And you, the individual investor, cannot get access to this method of exchange.

Say it with me folks; the New Pecora Commission must hold hearings on this practice and propose effective and fair regulation.

[Earlier posts in this series and related links at Kouril’s Foreclosure Fraud Resources]

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.

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