In this Taking Stock video, Dennis Kelleher describes the progress of the Consolidated Audit Trail (CAT), a proposed SEC supercomputer that will be used to track orders and peer into dark pools. While this sounds like a good idea, Kelleher describes the conflicts of interest inherent in the proposal process the SEC is using for CAT.
“Dark pool liquidity is the trading volume created by institutional orders executed on private exchanges and unavailable to the public. The bulk of dark pool liquidity is represented by block trades facilitated away from the central exchanges. It is also referred to as the “upstairs market,” “dark liquidity” or “dark pool.” The dark pool gets its name because details of these trades are concealed from the public, clouding the transactions like murky water. Some traders who use a strategy based on liquidity feel that dark pool liquidity should be publicized to make trading more “fair” for all parties involved. With the advent of supercomputers capable of executing algorithmic-based programs over the course of just milliseconds, high-frequency trading (HFT) has come to dominate daily trading volume. HFT technology allows institutional traders to execute their orders of multi-million share blocks ahead of other investors, capitalizing on fractional upticks or downticks in share prices. When subsequent orders are executed, profits are instantly obtained by HFT traders who then close out their positions. This form of legal piracy can occur dozens of times a day, reaping huge gains for HFT traders.”
Kelleher is the CEO of Better Markets, a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street, and “make our financial system work for all Americans again.”
According to Kelleher, the CAT supercomputer will not come online until 2018 “at the soonest.”