Monday, April 15, 2013

Internal exchanges in financial markets

The NY Times has a story on the increasing volume of trade going on in "dark pools," as opposed to in public exchanges. As Market Heats Up, Trading Slips Into Shadows. One point it makes is that some funds feel the exchanges aren't as safe as they used to be, e.g. because of high frequency traders.

The passage I found most interesting however, was about intercepting the trades of small investors before they get to exchanges:

"Other places besides the 30-plus dark pools are stealing the business of stock exchanges. A handful of firms including Citigroup and Knight Capital pay retail brokers like TD Ameritrade and Scottrade for the opportunity to trade with ordinary retail investors before the orders can reach an exchange, a phenomenon known as internalization. This type of off-exchange trading has also been growing, in part because of the recent revival of interest in the stock market among ordinary investors."

This is a little bit like what we are seeing in kidney exchange, in which big transplant centers withhold their easy to match pairs and transplant them internally.  See e.g.
Ashlagi, Itai and Alvin E. Roth, "New challenges in multi-hospital kidney exchange," American Economic Review papers and proceedings, May 2012, 102,3, 354-59

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