Dark Pools

Facts:
Dark Pools: Trading pools without transparency. The investors involved, usually large institutions, can trade in secret without informing the public of their transactions. Prices are driven by publicly traded information but have no public visibility.

Since this is a new hot issue with the SEC we thought we’d weigh in a little bit on this issue.

In order to get a sense of what’s really going on we decided in this month’s blog post to show the “Pros” and “Cons” of Dark Pools.

Please feel free to comment if you disagree or even applaud some of what we’ve found.

Argument For Dark Pool Oversight:
• In order for there to be ‘Fair Trade,’ there needs be transparency and assurance in publicly traded stock.
• The allowance of Dark Pools and their increased trend would undermine the Sarbanes-Oxley Act of 2002 which was designed to promote transparency and assurance.
• The opacity of the dark pool allows a ‘two tiered market’ where one group (participants of the dark pool) will have privileged information that those outside the dark pool would not.
• This transparency would allow for an actual free market equilibrium that the current opacity and the increased growth of Dark Pool would inhibit.
• Dark Pools become similar (if not the same) as illegal insider transactions where only a privileged few have access to information that the public at large does not have access to.

Argument Against Dark Pool Oversight:
• Not disclosing these large trades by institutional investors prevents others to unfairly capitalize on their large transactions. For example, if CALPERS were to “dump” a few million shares of their holdings of eBay, then the rest of the market would “feel” they know something the rest of them don’t therefore causing the stock to take a dump in price more often than not on wrong information, and they are “emotionally” selling their shares because an institutional investor sold off their shares.
• Technically restricts a free market economy by increasing regulation. This increased regulation restricts the market from finding its own true equilibrium considering that the actual market equilibrium is one that was ‘guided,’ by shining a light onto the dark pool so to speak.
• If the two tiered market is what the free market is tending towards, it may be due to a socio-economic need that the SEC may not be aware of. (Structural Functionalist argument).

In conclusion, dark pools have existed without much of a ripple in our free market society. However, given new political climate of “reform” and “yes, we can make change” it seems like Wall Street will have to bend to new regulations on these dark pools. We’d like to hear from you all and get your feedback on whether dark pools should or shouldn’t be more regulated?

References:

Securities and Exchange Commission, 2001. ‘SEC Issues Proposals to Shed Greater Light on Dark Pools.’ Available at: http://www.sec.gov/news/press/2009/2009-223.htm Accessed November 03, 2009

Securities and Exchange Commission, 2001. ‘Insider.’ Available at: http://www.sec.gov/answers/insider.htm Accessed November 03, 2009

Benyon, D. 2009. OTC derivatives face Mifid II ‘ripples-black-pool-185×114.’ Available at:
http://www.risk.net/oprisk-and-compliance/news/1557020/otc-derivatives-mifid-ii
Accessed November 03, 2009

David's Office in NY

David Friehling, Auditor for Madoff

David Friehling, 49, was arrested last week (Wed. March 19th) for assisting Madoff in his scandal of defrauding over $50 Billion from approximately 4,800 investors. Here’s the load down. David worked out of a tiny office (13 by 18 foot office) located in Rockland County, New York. He’s a Cornell Alum so you know he’s not stupid just really smart &  unfortunately greedy. Friehling is the first person to be arrested since the Madoff scandal broke three months ago.  David’s arrest is the first of a series that more is sure to come.  We now know David pulled down at least $5.5 Million from some of Madoff’s investment accounts.  David was able to do this by first replacing Madoff’s name with Madoff’s wife’s name then later David put his own name on some of these investment accounts.  Not to mention his auditing and consulting fees ranged from $12K to $14K/month.  David’s partner, Jerome Horowitz, died last week from cancer.  So now David is the only one left at the firm to prosecute.  I’m curious if any of his attorney’s will be arrested, as they have some accountability of assisting Madoff in keeping his secrets.  I would love to hear your thoughts on what should happen to Madoff’s CPA.  Should he rot in jail for years and years?

Watching SNL over the weekend I couldn’t help but laugh so loud seeing the skit about the “transformation” of Barack to the “Rock”.  The best sceen in that skit was the Rock slamming the phone when a rep of AIG asked for more bail out money.  I still have yet to see some full disclosure on the accountability of the use of our tax dollars.  I realize that there are departments in our government that do internal audit functions and some external auditors that “after-the-fact” will evaluate how our money was used.  My concern is that once the money flood gates are open, the on-going monitoring of funds will never catch up to the actual use of our tax dollars.  Now GM is failing even when they were given bail out money and want even more.  When do we say ENOUGH!

SEC\’s response to Madoff questions by Ackerman

As I watched the grilling of the SEC representatives by Mr. Ackerman I felt that finally the SEC was getting a wake up call and wondered what was the point of having all these new regulations from Sarbanes-Oxley Act of 2002 (”SOX”), if our regulators wouldn’t respond to whistleblower allegations.  Madoff not only took in $50 billion from mainly sophisticated investors, but he proved that the SEC whistleblower policies didn’t work and thus, crushed “us” the average investor’s confidence in the SEC’s abilities.  So what’s next after this terrible disaster?  More regulations??  I hope not.  Given our economic crisis we need to really evaluate if adding more regulations is necessary or is it just really enforcing the ones we already have and creating best practices and policies surrounding our rules & regulations.  Please weigh in if you feel new regulations should be added or keep the ones we have and really enforce them?

New 2008 COSO guidance just came out. Based upon our reading and understanding COSO is staying we should be leveraging higher management controls and do less on process level control testing