Project Turquoise: Priming the pump for the next bailout

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One of the primary lessons we are learning from the current financial debacle is that the lack of transparency in the OTC derivatives markets is one of the big reasons for the complete breakdown of those markets. Furthermore, the lack of appropriate oversight into those markets allowed problems to fester rather than being noticed and dealt with sooner.

I, along with others in the blogosphere and the MSM have called for greater regulation of these OTC markets as a means to prevent the disasters that have befallen such instruments as CDOs, CDSes, ABSes, etc. While the exact type of regulations required is certainly being fiercely debated, President Bush, Secretary Paulson, Fed chief Bernanke, and indeed, even many Wall Street heads have all admitted the need for more regulation and oversight of some type.

Well, some lessons are never learned. Just as the nation’s policy makers are discussing how to bring new and unwieldy instruments such as credit derivatives under appropriate regulation, a consortium of investment banks has proposed creating a private market for plain equities, a market which does not currently seem to be suffering from its current regulatory apparatus.

Behold, Project Turquoise (Hat tip Mara for mentioning it in the comments):

Project Turquoise, the share trading system backed by a group of the world’s largest investment banks, will allow transactions both on-exchange as well as in “dark liquidity” pools, where firms offer to buy and sell large blocks of shares away from public sight.

Speaking at an Exchange Forum conference in London, Phillip Hylander, co-head of European equities at Goldman Sachs (NYSE:GS) , set out for the first time the broad outlines of the business model that has promised to bring more competition to European share trading.

“Turquoise is to be a hybrid that will incorporate a public order book and a non-public order book,” Mr Hylander told the conference. “Turquoise will be an aggregator of ‘dark pools’.”

Project Turquoise was apparently initially dreamed up as an alternate stock exchange that would compete with European exchanges such as the LSE, thus leading to lower trade commisions. This would have been a welcome development. However, in addition to its public exchange facilities, Project Turquoise now aims to enable private placements of large lots of stock without the need for public disclosure of those trades as would be required if they were executed on a public exchange. While firms engaging in such trades may view such disclosure requirements as “burdensome regulation”, it’s that disclosure that forms the basis for policing against such illegal practices as pump-and-dump and insider trading, while ensuring that for any given time, there is only one best bid and offer which is freely available to anyone who wants it.

Furthermore, it’s precisely those types of private deals that contributed to the current collapse of OTC markets by hindering the normal market processes of price discovery and aggregation of liquidity.

These “dark liquidity” pools are already casting a long shadow on the traditionally open American equities market. According to Reuters last year:

Top IPO underwriter Goldman Sachs Group Inc. (GS.N: Quote, Profile, Research, Stock Buzz) this week launched a platform allowing an exclusive club of big investors to trade unregistered, privately placed securities, in the latest challenge to U.S. equity markets.

Private placements have become a big deal on Wall Street, another alternative for companies who want to raise capital but don’t want the regulatory and disclosure requirements that come with a public listing.

. . .

Last year [2006], according to Nasdaq, $162 billion of capital was raised through unregistered private placements compared with $154 billion through IPOs, which are registered with the Securities and Exchange Commission.

. . .

Under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers, investors with at least $100 million of assets, and there are no more than 499 stockholders.

By easing the ability to trade through essentially unregulated and unreportable pools of money, Goldman Sachs and the rest of the i-banks are weakening the public equity markets that have served as the foundation for much of the world’s financial systems. While I’m all for creating new exchanges to allow competition to lower trading costs, and I’m all for bringing in new sources of liquidity to fund investments, doing so without the safeguards of public disclosure and oversight is a prescription for disaster. A disaster that we’re already seeing unfold in other markets.

So is Project Turquoise the bearer of doom and destruction to public equity markets? Conversely, will it strengthen equities markets by bringing in new sources of liquidity? Or is it really nothing more than a way to lower trading costs through competition? We’ll know soon. Project Turquoise is scheduled to start trading this month…

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  1. Marsha Keeffer

    Wall Street consistently develops new ways to make money – Project Turquoise is just another in a long line of such schemes. It’s a push-me, pull-you between the street and the regulators.

  2. Anonymous

    There is not only Turquoise.
    Another Projects are: Chi-X, “Smart Pool”, BATS, “Dark Pool” from SWK.

  3. Richard Kline

    *Grrrrrrrrrr* Where are Glass and Stegall when we really need them? If we can’t figure that one out, in ten years and more we’ll find out where Lenin and (Huey) Long have been sleeping under the mountain these many years. Here’s a factoid to take into account, the wholly different cultural context (for the nonce) nothwithstanding: The source of Putin’s considerable popularity in Russia is that he crushed the truly hated financial oligarchs who had seized the country’s assets and run roughshod over the public. Wall Street doesn’t understand that if they eat all the cake they can, and will, lose their heads over it. Which wouldn’t bother me except a lot o’ other folks usually get shortened in the process, too.

  4. Anonymous

    August 13, 2008
    There once was a farmer in Texas who shipped a rail car of onions to the East Coast. He sold the onions to a trader in Arizona who then sold the same to a trader in Colorado, who then sold the same to a trader in Chicago etc. until it reached the produce buyer/seller in New York City. The New York buyer then called the farmer in Texas and complained that the onions he received were rotten and uneatable. The Texas farmer responded with, “What do you mean uneatable. Those onions were for trading not eating!”
    Earl L. Crockett
    Santa Cruz, CA

  5. Scott

    You can always trade away from the exchanges; you just pick up the phone and start dialing. This project is just a way for bankers to fleece unsophisticated institutions.

  6. Anonymous


    I laugh

    these fuckers are too much

    I wouldn’t put my George Washington’s into any market, ever

    I’m selling out, becoming intentionally homeless and will rely from this moment forward on the kindness of strangers

    and, as God is my witness, I will never want again

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