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Money Stuff: Dark Pool Sold Some Order Flow

by
Matt Levine
Money Stuff
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Bad PFOF

  • The SEC instituted settled charges ($1.2 million in fines) against Coda Markets for making misleading statements to the subscribers of its alternative trading system (ATS) about how it handled and routed orders for execution.
    • Customers subscribed to Coda ATS (a dark pool) would send orders to Coda and Coda would either execute or route the orders in the pool elsewhere.
    • People do this in hopes to buy a stock at the real price rather than the "lit" market price.
    • Instead, Coda gave these orders to its partner net trading firms, then sent their orders where they would get the best price, then let them fill the customers’ orders at a worse price, and then took a cut of the profit.
    • While customers expected Coda to route their order where it would get the best price, they ended up getting a worse price.

"Banks are Tech Companies"

  • While many banks are going digital, some banks, like Franklin Equity Group Trading, have continued to track IPO deals with paper and phone calls. Capital Markets Gateway LLC has set out to change that and completely digitize these deals.
    • There is a lot of areas in finance where the lucrative value-add is finding a solution to keep track of trades and deals.
    • The downside to this tech is that it takes out the "relationship-building" side of deals, therefore diminishing the value of the banker.

Meme Stocks

  • While people like to blame social media for making the internet a hostile environment, it actually gives people what they want, as revealed by their actions.
    • E.g., People actually like participating in political battles on Facebook, despite what they say.
  • This is similar to meme stocks and Reddit: The popularity of meme stocks is now the main driver of engagement on Reddit (like FB and politics). Whether or not people like it, Reddit is going to capitalize on that.

Evergrande

  • Beijing regulators told Evergrande to complete unfinished properties and repay investors while avoiding near-term default. There's no indication that regulators are offering financial support for the bond payment.
    • Requiring Evergrande to focus on both delivering to customers and bondholders makes both worse off.

Employer front-running

  • Sergei Polevikov, a Frankfurt fund manager, admitted to front-running investment decisions he made on behalf of his employers on 55 occasions between April and September last year, making €8.1m in net profit. The SEC announced charges against him today.
    • Lesson: if you are considering insider trading, don't do it by buying short-dated out-of-the-money call options on merger targets. The SEC will definitely notice.
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