Signs of the Coming Crash: Exotic Liquidity Instruments

I came across a term that I had never heard before, Dark liquidity pools.

These pools are basically a private and unregulated system of equity and bond trading.

It allows people to execute large purchases and sales without any public knowledge.

An activist hedge fund, for instance, may not want to reveal that it is buying up large blocks of stock in a company it is about to attack, or a mutual fund might want to sell a large amount of stock without causing a downdraft that would hurt any shares it still holds.

In a less enlightened era, this might be called fraud or insider trading, but those quaint notions originating from the FDR era reforms have been set by the wayside as a result of "reforms" beginning in the late 1970s (Thanks Jimmy Carter), accelerating in the 1990s (thanks Bill Clinton), and regulations have been largely ignored in the 2009s.

What's more, the uses of these instruments are exploding.

The hunger for anonymous block trading has caused the field to explode. There are about 40 active pools, double the number just last year. New pools and services to aggregate them are announced almost every month.

We should be concerned because it is yet another way for the insiders to make money off the information asymmetries in the market, and to further leverage their investments.

Much Like in 1929, theese will come back to haunt us. Without transparency, when reverses will set off a cascade of collapse, much in the way that they did on Black Tuesday, because the public prices will no longer accurately reflect asset values, and people will be trading blind.