With the rise of index-based investing, many more traders found themselves with the need to offload or acquire many more shares of many more companies precisely at 4 p.m. each trading day, so as to achieve their goal of matching their underlying indices, which between the hours of 4 p.m. and 9:30 a.m. sit motionless at the number. Indices, of course, have that luxury, because they don’t actually own any of their constituents stocks. Index funds, on the other hand, have to scramble. This created rather a lucrative market for stock exchanges, since they run those closing-bell auctions, and they knew it. So they started raising prices.
Now, the banks routing them these trades didn’t like that one bit. After all, it was bad for their customers. Well, these paragons of the public trust and stewards of fair play decided to do something about it: Make the trades themselves. After all, they had these great and not-at-all-suspect dark pools to do the work in. Yes, it would make them a few extra bucks doing so, but don’t be crass: This was about helping the little guy, like Vanguard and BlackRock, avoid getting gouged by the bourses. How dare you even begin to impute an underlying profit motive to the likes of Goldman Sachs.
Oh, wait, you are imputing such? In fact, you’re coming out and saying maybe this isn’t such a great thing in all sorts of ways? For shame.
Some clients are wary. “To me, it’s a black box,” said Mehmet Kinak, global head of systematic trading and market structure at T. Rowe Price Group Inc. He said T. Rowe, which manages $1.04 trillion, avoids guaranteed-close trading because it is “completely nontransparent….”
In an agreement that it asked one prospective client to sign, Goldman acknowledges that efforts to execute the trade while protecting itself from adverse price moves “may impact market prices” in ways that are unfavorable to its clients, according to a copy reviewed by The Wall Street Journal.
“I know I’m getting the closing price,” said Mr. Kinak, of T. Rowe. “But I don’t know that it’s the best price I could have achieved.”