Drowning, not splashing, in dark pools
24 Nov 2012 SYDNEY MORNING HERALD - MICHAEL WEST
One disadvantage of longevity in journalism is persistent exposure to that annoying phenomenon called the "crackdown".Like cicadas on a summer evening you rarely get to see an actual crackdown with the naked eye - or witness an authentic "tough new regime" for that matter - but you certainly hear a lot of them.The latest crackdown to be crafted from the whiteboard jungles of the PR realm is a crackdown on "dark pools" and high-frequency trading.Swashbuckling Financial Services Minister Bill Shorten sallied forth a few days ago with a probe: "an initial round of measures to put the clamps on dark pools".Hard on the heels of the Shorten probe, the doyen of crackdowns himself, corporate regulator Greg Medcraft, declared that a taskforce had been established to execute the crackdown.But this dark pools crackdown was akin to sending one's taskforce into war when the war is over and the mutilated bodies are being stretchered off the battlefield.The biggest dark pool of the lot is right under their noses, and that is the dark pool commonly known as the Australian Securities Exchange.At the behest of a handful of big broking houses, the ASX introduced a broker ID blackout in 2005.Until then, every share transaction had a broker ID number beside it. There has been zero transparency ever since.To borrow from the immortal words of Eric Olthwaite, (Ripping Yarns) this is a dark pool so black that even the white bits are black.Colossal arbitrages between futures, options and share markets, "front-running", market manipulation - it is open slather for the big boys now.Rivalry from the smaller brokers, their demise sped up by the digital revolution and financial crisis, has faded. Retail punters and most ASX companies are the losers. Many punters fled for the CFD (contracts for difference) "market" or the FX (foreign exchange) "brokers", only to be finally and comprehensively ransacked.For those who haven't had the pleasure of an acquaintance with this great demon, dark pools, it simply means trading things in a market which other people can't see.The irony is that the institutional players who sometimes inhabit in these demon pools outside the purview of the ASX, have done so precisely to avoid having their transactions tampered with by the high-frequency traders in the ASX dark pool.Deploying fancy software to trade by the millisecond, the incursion of these high-frequency trader types has snipped a bit of value from everybody.When the ASX snuck in its broker blackout seven years ago, replete with the requisite "independent" report which inevitably cheered it home, there was this: "Preliminary evidence suggests that an anonymous environment may not be optimal for less active non-ASX/S&P 200 stocks."This admission, sadly, was buried beneath the impenetrable "univariate analysis" of "heteroscedasticity" and the likes.The consultant, SIRCA, had earned its dough. No one read the thing. The black-out remained in the trial phase until the one journalist and two brokers whinging about it got bored and moved on.If the market was properly opened up for competition - clearing and settlement etc - the public could decide whether to opt for darkness or transparency.In most things, more transparency is better than less transparency.In markets, this reporter can only think of one case where this precept may be challenged, and that is in executive pay.When they forced disclosure of pay, it spawned the remuneration consultants who spurred on the rash of "Hey, I want what he got" claims. Things spiralled out of control.So here we were just last week, foolishly extolling the efficacy of the "two-strikes" regime and the new temperance in remuneration this year when, kaboom, Mike Smith just planted a bomb and made off like the Road Runner.Thanks to the ANZ board, their chief executive was paid a cool $19.1 million last year. The spin is that the "real"' number is more like $10 million and the rest was due to deferred stock which just happened to vest during the period. But Smithy was still paid a ludicrous $14.75 million the year before that - so things remain "on trend".At the other divisions of that government-guaranteed network they call the Big Four, Gail Kelly took home $10.7 million while Cameron Clyne demurely endured a pay cut for NAB's poorly performance.Meanwhile, the QR National meeting came and went this week as chairman John Prescott rationalised the board's decision to ratchet up bonuses on the grounds of some changes to accounting treatments. Last year, they rewrote the rules and blamed the floods.This year the official line was that the accounting changes enhanced shareholder value.The last company we can recall to drive shareholder value via accounting treatments was Babcock & Brown. One scallywag tweeted from the meeting about Prescott, "Too old, too slow" but we disagree. Here in the media we are desperately missing Babcock & Brown and gladly welcome this engineering of innovative pay solutions which was never canvassed in the QR prospectus.Bring it on, we say! Let us pine for the Babcock epoch no more.While Prescott and co managed to ramp up bonuses by extending the useful life of the group's locomotive assets, they managed to decrease the useful life of the existing board.And the Queensland government, having claimed it would not vote its stake in favour of the exotic initiatives, did vote its stake. So it's "yes" to bigger cheques for fat cats and "yes" to public health cuts and frozen disability allowances.