A new era

Anyone who has bought & sold stocks for themselves has likely done so via an exchange like the NYSE or NASDAQ. These well known platforms serve multiple functions, most notably to provide transparent pricing to investors.

However, some institutions and others wish to buy & sell stock without making their actions as visible. These are largely done via dark pools.

Dark pools and other “Alternative Trading Systems” allow buyers and sellers to transact “off the grid”, apart from traditional exchanges which can give added anonymity to market participants and prevent price transparency for large buys & sells from matriculating to the broader market.

These dark pools and ATS’s represent a growing share of total trading volume in US stocks and the growth does not appear to be slowing down.

If you like to buy & sell your own stocks then how might this trend affect you?

For starters, dark pools can price shares at values not necessarily in line with what you would see on the NASDAQ. For instance, two parties might transact on a massive block of shares in a company at $34 in a dark pool while the price you see quoted online is $36. While this type of spread is uncommon, you can see how this attribute to a dark pool can create possible arbitrage opportunities.

GameStop, the video game store whose stock became a meme sensation several years ago, now experiences very large dark pool trading activity.

Next, as trading volume leaves traditional exchanges for alternative ones, the true market value of a stock can be impacted because you now have investors in multiple arenas trading the same stock at different prices.

Third, some of these off-the-grid exchanges may allow transactions during non-market hours…giving them a leg up to either accumulate or dump a large position overnight while traditional investors must wait until 9:30am EST the following morning to catch up.

The growing dynamic of dark pools is also gaining the attention of proponents of blockchain technology, who feel that bringing stock trading “on-chain” would allow for a more seamless & transparent way to trade and swap financial assets. Even Larry Fink, the CEO of Blackrock feels that it’s imperative that the US begin to explore this new alternative.

While no one expects massive change to happen overnight, even in a Trump administration that appears to be pro-crypto, it is worth keeping a close eye on this. Technology will play an important role in the future of trading. It wasn’t too long ago when I was a summer intern at Morgan Keegan, we wrote trades down on little pieces of paper then hand deliver them to someone in our office who then called into the New York office to place the trades. Things can evolve quickly!

Finally, here is what’s on my radar:

lending & credit

In 2023 it seemed banks were headed for a crisis. Commercial RE was a dumpster fire and banks had massive unrealized losses on the bonds they held on their balance sheet due to rising interest rates.

Then with the apparent side-stepping of an economic hard landing it seemed banks, particularly regional & community ones might have avoided a calamity.

Bloomberg is out with an article throwing cold water on that notion. They write that the resurgence in rates coupled with the extension of bad RE loans suggest regional banks could face troubling times. In particular one analyst suggests nearly half of commercial RE loans are underwater.

Clearly these lenders aren’t out of the woods yet.

macro

With a new administration at the helm for the next 4 years I’ve fielded a bunch of questions about the likely direction of the economy. We don’t have a crystal ball therefore we don’t invest like we do…but still we have conviction in our views.

There are lots of reasons to be optimistic. Technology/AI/Crypto policies could spur a massive growth boom and the US consumer has managed to remain surprisingly resilient. Important about this cycle from others is consumers are benefitting from higher wages (albeit higher costs too), but it’s a better scenario than say a credit/interest rate bubble we saw in 2008 where incomes were largely flat and the growth came via borrowing (aka mortgages)…

Potential risks this year largely coalesce around liquidity and currency. The US Government (and most others) are drowning in debt and will have to issue more bonds soon. The demand for these bonds could soak up a ton of liquidity from other asset classes and create downward pricing pressure. Additionally, many other countries invest in US stocks & bonds and as the US Dollar strengthens vs their own currency it significantly impacts their repayment ability….so in a cash crunch these countries may have to dump other assets.

Lastly, inflation risk continues to be real….I write about it a lot as you know. High rates can potentially impact growth and disrupt the finances of many businesses & families. As I’ve also rambled on about, a government’s way to cope with this problem has been to print more currency….a boon for real assets (bitcoin anyone?) and a problem for bonds.

Want to dive deeper into this topic then I highly recommend checking out what our CIO/Founder Kevin Harper recently came out with highlighting some very important points to be focused on going forward.

bitcoin

By now you’re probably aware of the bitcoin strategy being implemented by MicroStrategy and others..but this is something new.

Newmarket, a lender in the real estate space is financing multifamily investment by requiring the borrower to use a portion of the loan proceeds to buy Bitcoin to add to that entity’s balance sheet. For this to work one must have strong conviction that both BTC can continue to rise in price and that our USD will continue to get inflated away.

Check out the interview here.

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

Please refer to our disclaimers below!

This communication has been prepared solely for informational purposes and is not an offer, or a solicitation of an offer, to buy or sell any securities or products or to participate in any product or trading strategy. No sale of securities will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. If any such offer of securities or products is made, it will be made pursuant to a definitive confidential offering document or other documentation which contains material information not contained herein and to which prospective investors will be referred. Any decision to invest in such securities or products should be made solely in reliance upon such documentation and not this communication. .Information contained herein is based on data obtained from statistical services, company reports or communications, or other sources, believed reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.  The views and opinions expressed in this communication represent those of Clark Gaines and should not be construed otherwise.Investment Advisory products and services are being offered through Almanack Investment Partners, LLC an SEC registered investment advisor. For additional information about Almanack Investment Partners, LLC, please visit www.adviserinfo.sec.gov.

No part of this material may be duplicated in any form by any means or redistributed without Clark Gaines’s prior written consent.