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December 1, 2009

What Egyptian Pigs and Dark Pools Have in Common

The poor pigs. Last April 29, the government of Egypt ordered the immediate slaughter of every pig in the nation. The order was carried out with a ruthless efficiency, as an estimated 300,000 porcine souls were led to an untimely meeting with their maker. The reason for such a brutal campaign? An unfortunate name.

A newly discovered virus, dubbed "swine flu," was spreading rapidly in Mexico at the time. And just as the Ayds appetite suppressant demonstrated some 20 years ago, an association with a deadly disease doesn't enhance your brand. And so, after what must've been quite a messy few days, the pigs of Egypt were soon but a memory.

Is there a lesson in this story for Wall Street's latest product to come under public fire, the unfortunately named "dark pools"? Barron's said in a July article, "Dark pools of liquidity sound as though they belong in a Gothic novel, not on Wall Street." The Economist said the name "sounds ominous." A November article about dark pools in The New York Observer was accompanied by a picture of a corpse-like hand protruding from a dark lake, either desperately beckoning for help, or possibly threatening to pull you in. The underlying message was clear: Something spooky is going on here.

The truth is much less romantic: They are not spooky at all. Dark pools are computerized trading systems that match buyers and sellers without publicly displaying bids and offers. They are only dark before the trade. After the trade, just like exchanges, they must report to the tape immediately for the whole world to see. The first one was created in 1987, although the name "dark pool" only became popular within the past 10 years.


The Name Game

Now swept up in the same regulatory vortex that is whirling around short selling and high-frequency trading, these obscure trading systems have suddenly begun drawing rants from bloggers, tirades from editorial writers, proposals from regulators and even inquiries from U.S. senators. It all begs the question: Is it time to rename the damn things?

Shortly after Egypt's mass pig-ocide, the World Health Organization announced its own giant renaming effort to avoid a further pandemic of pig panic: From here on out, the flu formerly known as swine would be called by a name only a bureaucrat could love: "H1N1." Although governments around the world dutifully picked up the nom-de-PR, everyone else continues to call it "swine flu." With a vaccine now being aggressively distributed, the disease will likely be eradicated before the name "swine flu" is. The H1N1 experience demonstrates why renaming "dark pools" is unlikely to work. Once a name sticks with the public, unsticking it is close to impossible. Since the name can't easily be changed, are dark pools as doomed as the pigs? Not if we learn anything from our Egyptian friends.

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