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The Twilight Zone Trade

Thursday, 4 Oct 2007 | 11:12 AM ET

You unlock this door with the key of capitalism. Beyond the hustle of the trading floor, is the fourth dimension. It’s a dimension of anonymity - of size - of price. Welcome to the land of the secret trades.

These so-called dark liquidity pools are essentially trading platforms where market participants can execute institutional-size orders, away from the open exchanges like the NYSE.

Unlike a typical exchange, size and prices are not displayed. Instead the investor blindly submits orders to the pool in hopes of finding a matching order on the other side.

Ratigan Report
Eyeing secret trades, with Bob Gasser, ITG CEO, and the Fast Money traders.

"It keeps the trade anonymous and keeps people from knowing your true intentions," says one trader.

They are particularly popular with traders from money management firms, where the cost of trading can often rise with a large order, particularly if the stock is illiquid.

Analysts estimate only 250 million shares a day are bought and sold in these pools - still a relatively small slice of total volume...but that's up from nearly nothing 6 six years ago. And even more growth could be on the horizon.

The Investment Technology Group (ITG) operates the "Posit System," one of the largest dark liquidity pools around. Bob Gasser, the company’s Chief Executive joins the panel for this conversation.

Who uses these, really?

“The market really changed dramatically back in the mid-1990’s when “Reg ATS” was brought into being by the SEC in response to NASDAQ trading scandals.”

Which scandals?

“In the mid-90’s collusion between broker-dealers was discovered…”

For pricing?

“Exactly. (During that time) there was a bucket brigade which consisted of a buy-side trader sending an order to a sell-side sales person who sent it to a sell side trader who sent it to a clerk on the floor on the NYSE who sent it to a broker who went into the crowd and executed it with a specialist.

He adds, “And institutional buyers… grew frustrated.”

Is there liquidity?

“Quite frankly the technology has evolved to the point where we are one of the leading aggregators of all of these dark pools. So when someone comes into ITG they have the ability to not only access Posit, but other liquidity pools. To them it seems like one seemless pool."

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Trader disclosure: On Oct 3, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Macke Owns (DIS), (HAS), (INTC); Macke Owned (DIS) And (HAS) On 9/10/07; Najarian Owns (BIDU); Najarian Owns (GS) Options; Finerman Owns (GS); Finerman Is Short (WYNN); Finerman's Firm And Finerman Own (KALU); Finerman's Firm Owns (ASD), (BWS), (NYX),(NMX), (BEAS), (PSS), (NVT); Finerman's Firm Owns S&P 500 Puts; Finerman's Firm Owns Russell 2000 Puts

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  • Chief Market Strategist for Virtus Investment Partners & CNBC Contributor

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